Michael Taft: Yesterday evening I was on Matt Cooper’s The Last Word with a representative from IBEC discussing wage levels. I quoted the numbers from the US Bureau of Labor Statistics, Eurostat and Destatis (German Statistical Board) to show that Irish labour costs are not high; indeed, they’re rather low by comparison with our EU partners.
The IBEC spokesperson insisted, however, that Irish wage levels are high – 15 percent higher than the EU-15 average. He quoted from the EU Commission’s AMECO database. I had no wish to get into an argument over this database or that; or get into a detailed deconstruction of the AMECO numbers. I just said I would put up the sources on this blog and let people decided for themselves.
Below I present the data and links. Then I look at the AMECO database. For it is the only one IBEC spokespersons use – and in doing so they are knowingly misleading the debate over our wage competitiveness.
Destatis: The German statistical board, using Eurostat data, presents the most recent numbers from 4th quarter 2008. They show, using hourly labour costs, that:
• Irish private sector wages are 1 percent below the EU-15 average (including lowly Portugal and Greece) and 14 percent below the average of our peer group – the other top 10 economies.
• Irish manufacturing wages are 2 percent below the EU-15 average and 16 percent below our peer group’s average
US Bureau of Labor Statistics: this database – based on hourly manufacturing compensation costs (including employers’ social security contributions) - is up-dated to 2007. This shows that:
• Irish manufacturing labour costs (including management salaries) are 3 percent below the EU-15 average, excluding Luxembourg and 16 percent below the average of our peer group.
• Labour costs for industrial workers (excluding management and clerical) are 3 percent below EU-15 average and 18 percent below our peer group.
These two databases are based on the actual cost of labour to employers on any hourly basis. This is the better type of measurement of costs in an economy.
OECD Benefit and Wages: this database, which measures private sector wages (NACE C – K) has a number of defects. First, it is not a measurement of labour costs but rather an attempt to identify annual wages. However, it acknowledges that some of the countries data may not include managerial and supervisorial wages, therefore under-stating some numbers. It also acknowledges that some countries data do not separate full-time and part-time wages (which we will see below can distort numbers). For Ireland, the figure is the average wage for production workers – not all private sector workers.
Especially curious are database figures for Irish wage across the years - showing inexplicable jumps:
2003: €33,939
2004: €27,781
2005: €39,206.
In 2007, the OECD shows Irish wages barely changing – up less than €300. In fact, in some previous editions of the 2007 database, average Irish production worker wages were much lower, below €33,000 – which is consistent with CSO data.
With these caveats, the database shows that average annual private sector wages in Ireland are 12 percent above the EU-15 average but 2 percent below our peer group average.
However, given the statistical inconsistency and methodological shortcomings, one should be extremely cautious about citing these numbers.
EU Commission AMECO: this database measures income but not hourly labour costs. Rather, take an ‘aggregate GDP’ approach. Essentially, they take the total amount of wages, salaries, bonuses, social security contributions and divide them by the number of workers. There are two problems with this:
First, it does not distinguish between full-time and part-time for most countries. Ireland has one of the lowest proportions of part-time workers. This can skewer the wage data (Germany, for instance has nearly twice as many part-time workers as a proportion of their workforce as Ireland). Let’s say that an employer needs 1000 hours worked with a total wage bill of €20,000. If that is divided up among 50 part-time workers, they will 20 hours a week with an average pay of €400. However, if that work is divided up among full-time workers, the average pay will be €800 per week. Whatever about the pay of different workers, there is no cost difference to the employer and no difference to wage competiveness.
Second, it does not distinguish between hours worked. Ireland has one of the highest levels of hours worked in the EU-15. If an employer needs 1000 hours worked with a total wage bill of €20,000 and divides it up among workers on a 40 hour working week, there will be 25 workers earning €800 per week. However, if that same employer divides up the working time a 35 hour working week, there will be 28.5 workers earning €700 per week. So, while there is a difference in wage, there is no difference in cost to the employer and no difference to wage competitiveness.
An aggregate approach rarely makes these distinctions. It can sometimes use a ‘full-time equivalent’ measurement – but AMECO acknowledges it cannot do this for all countries.
This is IBEC’s database of choice. As the IBEC spokesperson on the Last Word said – Irish wages would appear to be 15 percent higher than the EU-15 average. And this is what the AMECO database produces.
But does this figure measure hourly labour costs? No. Does it measure wage per hour worked? No. Does it measure the total amount of wages in the economy per total working hours? No. This database tells us what it tells us – and it tells us very little in terms of labour cost competitiveness. If the data compensated for hours worked and part-time employment, the figure would approximate the data from Destatis, Eurostat and the US Bureau of Labor Statistics.
No wonder that when our labour costs are examined with the proper measurements, other observers come to the same conclusion. The National Competitiveness Council stated:
‘Irish pay and income levels are moderate when compared to other developed high income economies . . .‘
Forfas’s report on the retail sector showed that average Irish wages are low in comparison with the Dutch retail sector.
This is more than just an argument over numbers and methodology. This is about identifying what exactly is wrong with the Irish economy and, from that, constructing policies to address the defects.
But IBEC is not interested in that. It is intentionally distorting the debate in accordance with its own agenda. Their use of wage statistics is deliberately misrepresentative.
Very simply, IBEC should stop it.
Saturday, 30 January 2010
No return to business as usual ...
"Unless there is radical reform of governance worldwide, the recovery, when it comes, is likely to be followed by yet another recession".
You can read the rest of Paul Sweeney's op-ed in yesterday's Irish Times here.
You can read the rest of Paul Sweeney's op-ed in yesterday's Irish Times here.
Friday, 29 January 2010
There are smarter ways to economic recovery
Stephen Kinsella: The smart economy is a nice idea, perhaps even a good idea. But like most nice ideas, when exposed to reality, the smart economy just breaks down. The smart economy as a concept takes no notice of the detail: who is looking for what type of job right now, and how long will it take those people to train for new ones? When confronted by the facts, we have to augment our industrial development strategy if we want to protect the real, on-the-ground, economy.
A smart economy is supposed to drive economic growth by bringing in or creating 'high value added' jobs for well-qualified people, who, because these jobs pay really well, make and spend lots of money locally, and pay lots of taxes, thus boosting the local and national economy. The smart economy idea has merit, but if we created the smart economy in full, no-holds-barred, tomorrow, if the smart economy succeeded beyond our policy makers' wildest dreams, it wouldn't help most of the people in the Mid West region who are unemployed for 3-5 years. This is because the idea of the smart economy is at variance with the facts of the type of unemployment in the Mid West right now.
The fact of the matter is that most of those newly unemployed come from construction and services, and will require significant and costly retraining, which may take years, to make them elligible for 'smart economy' jobs, even if those jobs were plentiful. The reserve of labour the Mid-West has right now, to be clear, is best helped by intensive retraining and retooling of a portion of the workforce, while providing state-stimulated projects to help workers and the local economy while retraining. Three infrastructural projects with long-run benefits to the region that are shovel-ready are the Links project, the expansion of Foynes port, and the Regeneration project, not to mention the 20+ recommendations of the Mid West Taskforce. Implementing large capital projects concurrent with up skilling, retraining, and business development programmes takes care of the time lags involved in training workers, boosts the local economy, and does not overly harm the debt: GDP ratio of a country running headlong into +100% debt: GDP territory in any case. The question to answer when thinking of borrowing for these types of projects is: does the long term social benefit exceed the long term social cost? If the benefits are a halt or reduction in the increase in unemployment, the creation of new capital and a reduction in social maladies like poor health and lawlessness, combined with an increase in local consumption and investment, coupled with the retraining of a large portion of the unemployed workforce, then, set against the cost of borrowing a fraction of the cost of NAMA's €54 billion to achieve those ends is, for me, worth it. I'd welcome any costings on such projects--if the long term benefits turn out to be less than the costs, I'll shut up.
You might ask why the MidWest is different, why it should receive special treatment ahead of other regions with similar, if not worse, problems. The answer is historical. The MidWest has underperformed economically relative to the rest of Ireland throughout the boom years. There are many reasons for the region's underperformance, but the fact remains. To focus exclusively on creating high-value added jobs is to disenfranchise tens of thousands of unemployed persons in the Mid West region, because they just won't get those jobs. The smart economy, rather than helping the newly unemployed, has hurt them, by diverting funds which could have helped them to other uses.
I'm not arguing for a return to the days of the construction boom: those days are gone, and good riddance to them. I'm asking that we look squarely at the data first, talk to people on the ground, and ask them what they need. Couple that to local and international expertise, and get something credible, accountable, and practical started inside of 6 weeks. Not 18 months. Not 24 months. Certainly not 3-5 years. Our unemployed can't wait that long.
A smart economy is supposed to drive economic growth by bringing in or creating 'high value added' jobs for well-qualified people, who, because these jobs pay really well, make and spend lots of money locally, and pay lots of taxes, thus boosting the local and national economy. The smart economy idea has merit, but if we created the smart economy in full, no-holds-barred, tomorrow, if the smart economy succeeded beyond our policy makers' wildest dreams, it wouldn't help most of the people in the Mid West region who are unemployed for 3-5 years. This is because the idea of the smart economy is at variance with the facts of the type of unemployment in the Mid West right now.
The fact of the matter is that most of those newly unemployed come from construction and services, and will require significant and costly retraining, which may take years, to make them elligible for 'smart economy' jobs, even if those jobs were plentiful. The reserve of labour the Mid-West has right now, to be clear, is best helped by intensive retraining and retooling of a portion of the workforce, while providing state-stimulated projects to help workers and the local economy while retraining. Three infrastructural projects with long-run benefits to the region that are shovel-ready are the Links project, the expansion of Foynes port, and the Regeneration project, not to mention the 20+ recommendations of the Mid West Taskforce. Implementing large capital projects concurrent with up skilling, retraining, and business development programmes takes care of the time lags involved in training workers, boosts the local economy, and does not overly harm the debt: GDP ratio of a country running headlong into +100% debt: GDP territory in any case. The question to answer when thinking of borrowing for these types of projects is: does the long term social benefit exceed the long term social cost? If the benefits are a halt or reduction in the increase in unemployment, the creation of new capital and a reduction in social maladies like poor health and lawlessness, combined with an increase in local consumption and investment, coupled with the retraining of a large portion of the unemployed workforce, then, set against the cost of borrowing a fraction of the cost of NAMA's €54 billion to achieve those ends is, for me, worth it. I'd welcome any costings on such projects--if the long term benefits turn out to be less than the costs, I'll shut up.
You might ask why the MidWest is different, why it should receive special treatment ahead of other regions with similar, if not worse, problems. The answer is historical. The MidWest has underperformed economically relative to the rest of Ireland throughout the boom years. There are many reasons for the region's underperformance, but the fact remains. To focus exclusively on creating high-value added jobs is to disenfranchise tens of thousands of unemployed persons in the Mid West region, because they just won't get those jobs. The smart economy, rather than helping the newly unemployed, has hurt them, by diverting funds which could have helped them to other uses.
I'm not arguing for a return to the days of the construction boom: those days are gone, and good riddance to them. I'm asking that we look squarely at the data first, talk to people on the ground, and ask them what they need. Couple that to local and international expertise, and get something credible, accountable, and practical started inside of 6 weeks. Not 18 months. Not 24 months. Certainly not 3-5 years. Our unemployed can't wait that long.
More on vacant houses ....
Last week, Nat O'Connor posted on vacant houses and the research carried out by the ntional Institute for Regional and Spatial Analysis. click here to read more on this by Eoin O'Broin.
Running to Stand Still: Next Generation Broadband in Ireland
Donal Palcic: Forfás published its latest report on Ireland’s broadband performance last week and as usual it evoked a strong sense of déjà vu. At times I feel sorry for the good people at Forfás who work on producing such reports, who must be frustrated at making countless constructive policy recommendations year after year only to see little or no progress on their implementation. Every year, the Forfás broadband reports highlight the positive developments in the Irish broadband market but every year they are forced to concede that we are still lagging significantly behind our peers.
A quick trawl through the introductions of reports from the last few years highlights the difficulty Forfás must have in coming up with a new formula of words to describe the same problem:
Forfás Broadband Report Nov. 2004:
“although there have been a number of significant developments in the Irish broadband market in recent years, Ireland continues to compare poorly for overall take-up of broadband and has slipped further behind the leading countries”.
Forfás Broadband Report Nov. 2005:
“although there have been a number of significant developments in the Irish broadband market in recent years, Ireland’s relative performance has not improved”.
Forfás Broadband Report Dec. 2007 (referring to findings of Nov. 2006 report):
“although there had been a number of significant developments in the Irish broadband market in recent years, Ireland’s relative performance continued to lag that of its competitors”.
Forfás Response to DCENR Consultation Paper on NGN (Oct. 2008):
“despite recent progress, Ireland continues to lag behind competitor regions in the range, speed and cost of broadband services. Critically, we also remain behind leading regions in developing a next generation network that will allow Irish businesses and households access to the advanced broadband services of tomorrow”.
Fast forward to the latest report and we are told that “while progress is being made in improving the cost and availability of basic broadband, Ireland is lagging at least 3 to 5 years behind competitor countries in terms of rolling out infrastructure capable of high speed next generation broadband”.
Part of the blame for our consistently poor performance must be laid at the feet of the Government. While it has (belatedly) intervened in the market through various programmes such as the County & Group Broadband Scheme, Metropolitan Area Network programme and National Broadband Scheme, these initiatives, while welcome, are simply not enough. Given the structure of the Irish telecommunications industry and its market and infrastructural characteristics, the Government needs to adopt a much stronger role in implementing effective policies and actions that will facilitate a more rapid rollout of next generation high-speed services.
ComReg also has a role to play in stimulating investment by private telecoms operators in the market. Key actions to facilitate private investment which were highlighted in the latest Forfás report are: 1) ensuring an appropriate return on investment; 2) examining the potential for infrastructure sharing and co-investment between private operators; 3) enabling wireless spectrum for the delivery of higher-speed broadband; and 4) ensuring wholesale access to Eircom’s products is made available (e.g. full local loop unbundling etc.).
While the above ComReg actions are of obvious importance in terms of the development of higher-speed services, Government actions also have a role in determining the speed at which the required private sector investment takes place. As highlighted in a number of Forfás reports, the State can play a significant role in facilitating investment.
The creation of a ‘one-stop-shop’ for State-owned broadband infrastructure would provide private operators with easier integrated access to core network infrastructure and facilitate further competition in the market. This recommendation was mooted years ago, however progress on this initiative has been painfully slow. As it stands the DCENR has established an Implementation Task Force to oversee the project and there is no indication of when we might expect to see it.
Other policy initiatives which have been suggested on a number of occasions and which have not been progressed quickly enough are: 1) making the provision of ducting in all new premises mandatory; and 2) making the provision of ducting in all relevant public works and State infrastructural development programmes mandatory (e.g. electricity, gas, rail, roads, water, sewage etc.). The latter is one area where the coordination of civil works by one utility network with all other networks would greatly lower the cost of investment for all. Indeed, the millions that will need to be spent in fixing the damage done to the road and water networks during the recent floods and cold snap present a perfect opportunity for installing ducting where feasible.
Even if all of the above was implemented tomorrow, it is far from certain that enough private investment in next generation infrastructure (particularly access infrastructure) will be stimulated, especially in rural areas. It may still be necessary for the Government to provide this infrastructure itself, or at the very least to partner with the private sector in delivering it. Failure to do so will put us at a massive competitive disadvantage to other countries in years to come.
The chief area of concern in the development of advanced high-speed broadband infrastructure in Ireland is the local access network. While investment by UPC in upgrading its cable network and investment by other companies such as Imagine in WiMAX technologies have improved things in this regard, these services are only available in certain parts of the country. Eircom’s dominance of the fixed-line market means that investment in its local access infrastructure will be of crucial importance in ensuring a more rapid rollout of next generation services across the country.
Eircom’s new owner, STT, appears to be establishing a more cordial and cooperative relationship with ComReg and has indicated that it plans to invest in Eircom’s network and intends to stay in Ireland for the long term. The recent move to drop Eircom’s legal case against ComReg’s decision to lower the monthly charge for shared line LLU services from €8.41 to €0.77 reinforces the view that the company will be more cooperative with the regulator than under previous owners. That said it is hard to see how STT plans to undertake significant investment in Eircom’s network given its approximate €4 billion debt burden. Indeed, S&P recently put Eircom’s rating of B on ‘creditwatch negative’ and warned that the company could breach covenants on some of its debt in the next year.
The EU has changed its State Aid rules to facilitate joint public-private investment in broadband infrastructure in both rural and urban areas. Governments in other European countries have recognised the importance of investment in fibre-based next generation networks by intervening in their telecoms markets. For example, last year, Finland (a country with a similar urbanisation rate as Ireland) made universal minimum internet access speeds a legal requirement. The Finnish government committed to a minimum speed of 1Mb/s per second from July of this year and 100Mb/s by 2015. Another example is the UK, where the British Government has set up a Next Generation Access fund (to come from a £0.50 monthly levy on all telephone landlines). The approximate £1 billion in funds that the levy generates will be used to facilitate the installation of fibre-optic cable in rural and suburban areas where it might otherwise have been unprofitable for the private sector to invest.
Further afield, the Australian Government has announced a multi-billion fibre-to-the-home project which will provide 100Mb/s connections to 90% of homes over the next eight years. The project is to be run as a joint venture with the private sector where the State will own a minimum of 51% of the project. In Singapore, the Government is providing almost US$500 million for a joint venture project with a private sector company to construct the passive infrastructure for a national next generation broadband network. A further US$166 million in funding is being provided for a separate joint venture with Starhub, a subsidiary of Eircom’s new owner STT, to build and operate the active infrastructure for the national network and will be competed by 2015.
It is clear that other countries realise the strategic importance of high-speed broadband and are taking steps to ensure their countries don’t fall behind. What is worrying for Ireland is that we are already behind many of the above countries as it stands and cannot afford to fall further behind through inaction. While many of the policy and regulatory actions mentioned earlier, if implemented, could do much to facilitate improved private investment in infrastructure, Ireland can ill afford to wait and see if the required investment will take place, and at the required pace. The Irish Government needs to become more proactive and play a stronger role in the development of Ireland’s next generation broadband infrastructure, particularly at the local access level. This requires either direct investment by the State or co-investment with the private sector (Eircom’s dire financial situation could provide an opportunity for the Government to step in and make a deal with the company in relation to its network infrastructure). Maybe then future Forfás reports won’t need to perennially point out that we lag competitor countries in terms of our broadband performance.
A quick trawl through the introductions of reports from the last few years highlights the difficulty Forfás must have in coming up with a new formula of words to describe the same problem:
Forfás Broadband Report Nov. 2004:
“although there have been a number of significant developments in the Irish broadband market in recent years, Ireland continues to compare poorly for overall take-up of broadband and has slipped further behind the leading countries”.
Forfás Broadband Report Nov. 2005:
“although there have been a number of significant developments in the Irish broadband market in recent years, Ireland’s relative performance has not improved”.
Forfás Broadband Report Dec. 2007 (referring to findings of Nov. 2006 report):
“although there had been a number of significant developments in the Irish broadband market in recent years, Ireland’s relative performance continued to lag that of its competitors”.
Forfás Response to DCENR Consultation Paper on NGN (Oct. 2008):
“despite recent progress, Ireland continues to lag behind competitor regions in the range, speed and cost of broadband services. Critically, we also remain behind leading regions in developing a next generation network that will allow Irish businesses and households access to the advanced broadband services of tomorrow”.
Fast forward to the latest report and we are told that “while progress is being made in improving the cost and availability of basic broadband, Ireland is lagging at least 3 to 5 years behind competitor countries in terms of rolling out infrastructure capable of high speed next generation broadband”.
Part of the blame for our consistently poor performance must be laid at the feet of the Government. While it has (belatedly) intervened in the market through various programmes such as the County & Group Broadband Scheme, Metropolitan Area Network programme and National Broadband Scheme, these initiatives, while welcome, are simply not enough. Given the structure of the Irish telecommunications industry and its market and infrastructural characteristics, the Government needs to adopt a much stronger role in implementing effective policies and actions that will facilitate a more rapid rollout of next generation high-speed services.
ComReg also has a role to play in stimulating investment by private telecoms operators in the market. Key actions to facilitate private investment which were highlighted in the latest Forfás report are: 1) ensuring an appropriate return on investment; 2) examining the potential for infrastructure sharing and co-investment between private operators; 3) enabling wireless spectrum for the delivery of higher-speed broadband; and 4) ensuring wholesale access to Eircom’s products is made available (e.g. full local loop unbundling etc.).
While the above ComReg actions are of obvious importance in terms of the development of higher-speed services, Government actions also have a role in determining the speed at which the required private sector investment takes place. As highlighted in a number of Forfás reports, the State can play a significant role in facilitating investment.
The creation of a ‘one-stop-shop’ for State-owned broadband infrastructure would provide private operators with easier integrated access to core network infrastructure and facilitate further competition in the market. This recommendation was mooted years ago, however progress on this initiative has been painfully slow. As it stands the DCENR has established an Implementation Task Force to oversee the project and there is no indication of when we might expect to see it.
Other policy initiatives which have been suggested on a number of occasions and which have not been progressed quickly enough are: 1) making the provision of ducting in all new premises mandatory; and 2) making the provision of ducting in all relevant public works and State infrastructural development programmes mandatory (e.g. electricity, gas, rail, roads, water, sewage etc.). The latter is one area where the coordination of civil works by one utility network with all other networks would greatly lower the cost of investment for all. Indeed, the millions that will need to be spent in fixing the damage done to the road and water networks during the recent floods and cold snap present a perfect opportunity for installing ducting where feasible.
Even if all of the above was implemented tomorrow, it is far from certain that enough private investment in next generation infrastructure (particularly access infrastructure) will be stimulated, especially in rural areas. It may still be necessary for the Government to provide this infrastructure itself, or at the very least to partner with the private sector in delivering it. Failure to do so will put us at a massive competitive disadvantage to other countries in years to come.
The chief area of concern in the development of advanced high-speed broadband infrastructure in Ireland is the local access network. While investment by UPC in upgrading its cable network and investment by other companies such as Imagine in WiMAX technologies have improved things in this regard, these services are only available in certain parts of the country. Eircom’s dominance of the fixed-line market means that investment in its local access infrastructure will be of crucial importance in ensuring a more rapid rollout of next generation services across the country.
Eircom’s new owner, STT, appears to be establishing a more cordial and cooperative relationship with ComReg and has indicated that it plans to invest in Eircom’s network and intends to stay in Ireland for the long term. The recent move to drop Eircom’s legal case against ComReg’s decision to lower the monthly charge for shared line LLU services from €8.41 to €0.77 reinforces the view that the company will be more cooperative with the regulator than under previous owners. That said it is hard to see how STT plans to undertake significant investment in Eircom’s network given its approximate €4 billion debt burden. Indeed, S&P recently put Eircom’s rating of B on ‘creditwatch negative’ and warned that the company could breach covenants on some of its debt in the next year.
The EU has changed its State Aid rules to facilitate joint public-private investment in broadband infrastructure in both rural and urban areas. Governments in other European countries have recognised the importance of investment in fibre-based next generation networks by intervening in their telecoms markets. For example, last year, Finland (a country with a similar urbanisation rate as Ireland) made universal minimum internet access speeds a legal requirement. The Finnish government committed to a minimum speed of 1Mb/s per second from July of this year and 100Mb/s by 2015. Another example is the UK, where the British Government has set up a Next Generation Access fund (to come from a £0.50 monthly levy on all telephone landlines). The approximate £1 billion in funds that the levy generates will be used to facilitate the installation of fibre-optic cable in rural and suburban areas where it might otherwise have been unprofitable for the private sector to invest.
Further afield, the Australian Government has announced a multi-billion fibre-to-the-home project which will provide 100Mb/s connections to 90% of homes over the next eight years. The project is to be run as a joint venture with the private sector where the State will own a minimum of 51% of the project. In Singapore, the Government is providing almost US$500 million for a joint venture project with a private sector company to construct the passive infrastructure for a national next generation broadband network. A further US$166 million in funding is being provided for a separate joint venture with Starhub, a subsidiary of Eircom’s new owner STT, to build and operate the active infrastructure for the national network and will be competed by 2015.
It is clear that other countries realise the strategic importance of high-speed broadband and are taking steps to ensure their countries don’t fall behind. What is worrying for Ireland is that we are already behind many of the above countries as it stands and cannot afford to fall further behind through inaction. While many of the policy and regulatory actions mentioned earlier, if implemented, could do much to facilitate improved private investment in infrastructure, Ireland can ill afford to wait and see if the required investment will take place, and at the required pace. The Irish Government needs to become more proactive and play a stronger role in the development of Ireland’s next generation broadband infrastructure, particularly at the local access level. This requires either direct investment by the State or co-investment with the private sector (Eircom’s dire financial situation could provide an opportunity for the Government to step in and make a deal with the company in relation to its network infrastructure). Maybe then future Forfás reports won’t need to perennially point out that we lag competitor countries in terms of our broadband performance.
Thursday, 28 January 2010
The State of the US
Nat O'Connor: I'm sure I'm not the only one who watched President Obama's State of the Union address to Congress. (Various versions of it are on YouTube, including here). I'd be interested to hear any comments you have on it.
It provided an interesting summary of the major steps that were taken in the USA to combat recession. And one can compare with what was done here. It's also interesting to see Obama's proposals for continued major reforms despite the recession.
President Obama said that he "hated" the bank bailout, but thought it was necessary. He noted that the US had recovered most of the money spent on recovering the banks, and his proposed levy on major institutions was designed to recoup the rest, so that taxpayers do not lose out. Is there much chance of taxpayers being 100 per cent paid back for the bank bailout here? Would Irish banks (once bailed out) have the capacity to pay a significant levy to bridge the gap?
He spoke about making 25 tax cuts, benefitting 95 per cent of working families. He also noted that income tax wasn't raised for anyone. Meanwhile, we had the income levy that affected everyone, and the pension levy on public servants. Our tax base simply collapsed without any cuts.
Obama's primary focus in 2010 is to be jobs, he said, and outlined some details of a Jobs Bill to be put before Congress. For example, his solution to the problem of credit flow was to take $30 billion of the levy from Wall Street banks and give it to community banks to lend to small businesses. Again, could our banks provide enough funds through a levy in order to fund such a scheme?
While admitting the $1 trillion added to the US national debt, Obama emphasised the role of the Recovery Act in developing infrastructure, such as high speed rail and clean energy facilities, to make up for the US lagging behind other countries. You might call this a classic case of counter-cyclical investment by the state in useful infrastructure that will help generate economic growth in the future. (At the same time, Obama is not a pure Keynesian. Many of his proposals are tax cuts or tax breaks).
However, despite the estimated 2 million jobs created by the stimulus package, this is overshadowed by the 7 million jobs lost in the recession. Hence, Obama spoke of the need for a long-term plan for economic growth; including "real reform" of the banking/financial system, major investment in basic research and various proposals about energy (including new generation nuclear power plants, offshore oil and gas development, biofuels and clean coal technologies). He spoke of making clean energy profitable (presumably by carbon tax or green subsidy) and the need to develop the US as a leading clean energy economy. He set an ambitious target to double exports in five years and compete for new markets, with some reform of export controls to help this. There seems to be a real risk that our "national plan" is to wait for the worst to be over and then get back to business as usual, with little real reform of finance/banking and no real strategy to diversify the economy.
In terms of skills and education, Obama proposed the end of the tax subsidy to banks for providing student loans and the conversion of that expenditure into $10 thousand tax breaks for families paying for college. He also took on the question of student debt, setting a maximum of 10 per cent of wages to be paid towards student loans per year, and for outstanding debt to be forgiven after 20 years (or 10 years if they enter public service). Personal debt is going to be a burden in Ireland for years to come. Could debt forgiveness become easier here than outright bankruptcy?
Obama also spoke about propping up house prices and helping people move to more affordable mortgages. Mortgages are going to become a major burden on many families as ECB interest rates rise (as they will). Major reform of the mortgage market may be required here to allow people to move to keep costs affordable. Also, our house prices were way above the equivalent US values (in terms of relating prices to likely rental income). So, we need to let the price of housing fall and stay lower, despite the obvious damage that has done to families' major asset and investments like property-based pension schemes.
In his speech, Obama also re-stated his case for health insurance reform, as well as speaking about the wars in Iraq and Afghanistan. He said he will use an executive order to progress a commission to look at ways of dealing with the US's enormous debt. He also spoke against the election spending ruling by the Supreme Court and spoke of lobbying reform. He spoke of civil rights, including taking steps to ensure equal pay for equal work for women.
At one point, Obama challenged the elected members of Congress to stop thinking solely about the next election, and to think about the needs of the next generation.
Good ideas?
It provided an interesting summary of the major steps that were taken in the USA to combat recession. And one can compare with what was done here. It's also interesting to see Obama's proposals for continued major reforms despite the recession.
President Obama said that he "hated" the bank bailout, but thought it was necessary. He noted that the US had recovered most of the money spent on recovering the banks, and his proposed levy on major institutions was designed to recoup the rest, so that taxpayers do not lose out. Is there much chance of taxpayers being 100 per cent paid back for the bank bailout here? Would Irish banks (once bailed out) have the capacity to pay a significant levy to bridge the gap?
He spoke about making 25 tax cuts, benefitting 95 per cent of working families. He also noted that income tax wasn't raised for anyone. Meanwhile, we had the income levy that affected everyone, and the pension levy on public servants. Our tax base simply collapsed without any cuts.
Obama's primary focus in 2010 is to be jobs, he said, and outlined some details of a Jobs Bill to be put before Congress. For example, his solution to the problem of credit flow was to take $30 billion of the levy from Wall Street banks and give it to community banks to lend to small businesses. Again, could our banks provide enough funds through a levy in order to fund such a scheme?
While admitting the $1 trillion added to the US national debt, Obama emphasised the role of the Recovery Act in developing infrastructure, such as high speed rail and clean energy facilities, to make up for the US lagging behind other countries. You might call this a classic case of counter-cyclical investment by the state in useful infrastructure that will help generate economic growth in the future. (At the same time, Obama is not a pure Keynesian. Many of his proposals are tax cuts or tax breaks).
However, despite the estimated 2 million jobs created by the stimulus package, this is overshadowed by the 7 million jobs lost in the recession. Hence, Obama spoke of the need for a long-term plan for economic growth; including "real reform" of the banking/financial system, major investment in basic research and various proposals about energy (including new generation nuclear power plants, offshore oil and gas development, biofuels and clean coal technologies). He spoke of making clean energy profitable (presumably by carbon tax or green subsidy) and the need to develop the US as a leading clean energy economy. He set an ambitious target to double exports in five years and compete for new markets, with some reform of export controls to help this. There seems to be a real risk that our "national plan" is to wait for the worst to be over and then get back to business as usual, with little real reform of finance/banking and no real strategy to diversify the economy.
In terms of skills and education, Obama proposed the end of the tax subsidy to banks for providing student loans and the conversion of that expenditure into $10 thousand tax breaks for families paying for college. He also took on the question of student debt, setting a maximum of 10 per cent of wages to be paid towards student loans per year, and for outstanding debt to be forgiven after 20 years (or 10 years if they enter public service). Personal debt is going to be a burden in Ireland for years to come. Could debt forgiveness become easier here than outright bankruptcy?
Obama also spoke about propping up house prices and helping people move to more affordable mortgages. Mortgages are going to become a major burden on many families as ECB interest rates rise (as they will). Major reform of the mortgage market may be required here to allow people to move to keep costs affordable. Also, our house prices were way above the equivalent US values (in terms of relating prices to likely rental income). So, we need to let the price of housing fall and stay lower, despite the obvious damage that has done to families' major asset and investments like property-based pension schemes.
In his speech, Obama also re-stated his case for health insurance reform, as well as speaking about the wars in Iraq and Afghanistan. He said he will use an executive order to progress a commission to look at ways of dealing with the US's enormous debt. He also spoke against the election spending ruling by the Supreme Court and spoke of lobbying reform. He spoke of civil rights, including taking steps to ensure equal pay for equal work for women.
At one point, Obama challenged the elected members of Congress to stop thinking solely about the next election, and to think about the needs of the next generation.
Good ideas?
Interrogating the Irish model
Peadar Kirby: This week saw a rare mention of political economy models entering the debate on the future of Irish society. Carl O’Brien’s series on the trade unions quoted David Begg as advocating a Nordic model for Ireland to replace the current ‘neoliberal path that we’re on’. Begg added that ‘what’s clear is we don’t have any future in the current model’ (The Irish Times, Jan 26th 2010). It’s not the first time that Begg has tried to stimulate a public debate on political economy models; he made a valiant and lone effort in the run-up to the 2007 election which fell on deaf ears.
It is remarkable how little attention is devoted to interrogating the political economy model that has led us into the present crisis; indeed, it is rare indeed to even find acknowledgement that such exists. For example, in reading the range of recent books by journalists and commentators on the present crisis, what is striking is the personalist nature of the analysis advanced. By this I mean that the many ills analysed – the poor quality of governance, the too close relationship between politicians and so-called ‘developers’, the failures of regulation, the growth of a banking culture that threw caution to the winds in its lending practices – are ultimately attributed to the failures of individuals. There is a deeply ad hominem quality to it all.
It must say something about just how badly we social scientists have educated generations of our students that the most fundamental insights of our trade are largely missing in the public debate – namely that power is structured and that individuals and groups are greatly constrained by the structures in which they operate. During the years of the Celtic Tiger, the term ‘Irish model’ began to be used to describe the state-market relationship in the Irish case, though it was used much more outside Ireland than within. It was a relationship that came to be envied among other latecomers to development in regions such as central and eastern Europe, the Middle East and Latin America where significant effort was devoted to learning and emulating the lessons. Yet, while basking in the international attention, Irish policy makers, politicians and the academic community made no attempt to recognise the nature of structured power that constituted this model. David Begg was very much a lone voice in advocating that a different model was needed.
Even after the collapse of the model, debate remains characterised by an almost total failure to examine the nature of the way that the state-market relationship came to be structured in Ireland, the origins and trajectories of this relationship, and what needs to be done to change it, as advocated by Begg. My own forthcoming book Collapse of the Celtic Tiger (Palgrave Macmillan, April 2010) has as its subtitle Explaining the Weaknesses of the Irish Model and is an attempt to examine the interrogate the particular ways that political, economic and social power have come to interact and mutually constitute one another, particularly over the course of the Celtic Tiger period, the legacies of which enormously constrain the sort of path that Begg advocates that Ireland now take, namely a social democratic Nordic-style model.
Examining the Irish model requires a recognition of the ways in which political power constituted a particular kind of market economy in the Irish case, one characterised by an enormous dependence on multinational capital. This is arguably the most fundamental constraint on moving in the direction that Begg champions; for example, there is a substantial literature in Irish political science, sociology and the more enlightened corners of economics that gives evidence of the ways that this dependence constrains Irish public policy across a wide range of areas. We urgently need more recognition of this and more public debate about it.
Various weaknesses of the Irish political system have come to feature in the current debate but little attention has been devoted to how reforms advocated might result in turning Irish policy making into a space of real deliberation of political economy options. Another feature of the Irish model is the weak and dependent nature of civil society organisations, drawn into far too close and subservient a relationship with the state especially over the course of the economic boom, with the result that it has almost entirely abdicated its function of being the incubator of alternative models from outside the dominant power structures. O’Brien’s two articles in The Irish Times this week illustrated well how the trade union movement is now grappling with overcoming this legacy. The very interesting project entitled Is Féidir Linn is doing something similar for a range of civil society groups. In these spaces the task of moving to a new model is beginning in the most initial, tentative and fragile of ways. It needs recognition and much support.
It is to be hoped that Begg’s advocacy of a Nordic model does not encounter the silence on this occasion that it encountered in mid 2007. For his recognition of the unsustainable nature of the present Irish model and therefore of the need for a new political economy model, relating public and private power in a new and more socially just way, is identifying a framework to analyse our situation that is vital if we are to get to the heart of the current crisis and find a sustainable way out of it. He himself recognises just how difficult it is going to be to move beyond the present model but a necessary first step is to begin to acknowledge that such a model exists and to begin to interrogate its many features.
It is remarkable how little attention is devoted to interrogating the political economy model that has led us into the present crisis; indeed, it is rare indeed to even find acknowledgement that such exists. For example, in reading the range of recent books by journalists and commentators on the present crisis, what is striking is the personalist nature of the analysis advanced. By this I mean that the many ills analysed – the poor quality of governance, the too close relationship between politicians and so-called ‘developers’, the failures of regulation, the growth of a banking culture that threw caution to the winds in its lending practices – are ultimately attributed to the failures of individuals. There is a deeply ad hominem quality to it all.
It must say something about just how badly we social scientists have educated generations of our students that the most fundamental insights of our trade are largely missing in the public debate – namely that power is structured and that individuals and groups are greatly constrained by the structures in which they operate. During the years of the Celtic Tiger, the term ‘Irish model’ began to be used to describe the state-market relationship in the Irish case, though it was used much more outside Ireland than within. It was a relationship that came to be envied among other latecomers to development in regions such as central and eastern Europe, the Middle East and Latin America where significant effort was devoted to learning and emulating the lessons. Yet, while basking in the international attention, Irish policy makers, politicians and the academic community made no attempt to recognise the nature of structured power that constituted this model. David Begg was very much a lone voice in advocating that a different model was needed.
Even after the collapse of the model, debate remains characterised by an almost total failure to examine the nature of the way that the state-market relationship came to be structured in Ireland, the origins and trajectories of this relationship, and what needs to be done to change it, as advocated by Begg. My own forthcoming book Collapse of the Celtic Tiger (Palgrave Macmillan, April 2010) has as its subtitle Explaining the Weaknesses of the Irish Model and is an attempt to examine the interrogate the particular ways that political, economic and social power have come to interact and mutually constitute one another, particularly over the course of the Celtic Tiger period, the legacies of which enormously constrain the sort of path that Begg advocates that Ireland now take, namely a social democratic Nordic-style model.
Examining the Irish model requires a recognition of the ways in which political power constituted a particular kind of market economy in the Irish case, one characterised by an enormous dependence on multinational capital. This is arguably the most fundamental constraint on moving in the direction that Begg champions; for example, there is a substantial literature in Irish political science, sociology and the more enlightened corners of economics that gives evidence of the ways that this dependence constrains Irish public policy across a wide range of areas. We urgently need more recognition of this and more public debate about it.
Various weaknesses of the Irish political system have come to feature in the current debate but little attention has been devoted to how reforms advocated might result in turning Irish policy making into a space of real deliberation of political economy options. Another feature of the Irish model is the weak and dependent nature of civil society organisations, drawn into far too close and subservient a relationship with the state especially over the course of the economic boom, with the result that it has almost entirely abdicated its function of being the incubator of alternative models from outside the dominant power structures. O’Brien’s two articles in The Irish Times this week illustrated well how the trade union movement is now grappling with overcoming this legacy. The very interesting project entitled Is Féidir Linn is doing something similar for a range of civil society groups. In these spaces the task of moving to a new model is beginning in the most initial, tentative and fragile of ways. It needs recognition and much support.
It is to be hoped that Begg’s advocacy of a Nordic model does not encounter the silence on this occasion that it encountered in mid 2007. For his recognition of the unsustainable nature of the present Irish model and therefore of the need for a new political economy model, relating public and private power in a new and more socially just way, is identifying a framework to analyse our situation that is vital if we are to get to the heart of the current crisis and find a sustainable way out of it. He himself recognises just how difficult it is going to be to move beyond the present model but a necessary first step is to begin to acknowledge that such a model exists and to begin to interrogate its many features.
Wednesday, 27 January 2010
Oh, those landlords and bankers
Michael Taft: Following on from the excellent points made by Proinsias Breathnach and Slí Eile regarding the role of labour costs in economic competitiveness, it might be timely to re-examine Forfas’s comprehensive study of the cost of running retail enterprises. This is, of course, an untraded sector but such sectors are held up as being drivers in our higher living costs. If wages are found to be excessively high in comparison to other Euro zone locations, then we might, just might conclude that high labour costs are uncompetitive and feed into the economy’s general uncompetitiveness. But if not, then what is the problem?
The usefulness of the Forfas study - carried out by FGS Consulting – is the detail in which it examines the input costs: labour, rent, utilities, professional fees, transport, etc. It compares Dublin, Cork, and Limerick with Belfast, Manchester, and London. It also compares costs with Maastricht which is useful because costs comparisons are not entangled with currency depreciation. In addition, they survey these costs for department stores, convenience, stores, operations in high streets, retail parks, etc. It’s exhaustive and illuminating.
That the cost of running retail operations in Maastricht is lower than in Dublin shouldn’t surprise us. The cost for running multiples is broadly the same. However, for department stores Maastricht is up to 15 percent cheaper while in retail parks they are 4 percent cheaper. So what accounts for these cost differences? Let’s run through the different categories (the following compares Dublin with Maastricht at 2008 prices).
Labour Costs: If Maastricht operations are cheaper, it’s not because of labour. Forfas surveyed four categories of employees and found that in all categories, wages in Maastricht were higher: Sales Assistant (12.7 percent higher), Customer Sales Rep (26.6), Retail Buyer (19.7) and (9.0). So, we can discount wages as the reason for high operating costs here.
We can also discount employers PRSI contributions: here they are 10.75 percent, in the Netherlands it is 17.28 percent - 61 percent higher. Add all that together and labour costs are substantially less in Dublin (real devaluationists – take note).
Gas: gas prices are 18 percent cheaper in Dublin.
Water charges: water charges are 16 percent cheaper in Dublin.
Transport and Fuel: Inbound freight costs are 52 percent cheaper in Dublin; petrol is 23 percent cheaper while diesel is slightly cheaper at 2 percent. Indeed, labour-related transport costs are 19 percent cheaper here.
Courier Costs: It costs €8 to deliver a package within Dublin’s city centre; in Maastricht the cost is €49.
Accountancy Costs per hour: It’s 7 percent cheaper in Dublin.
So, labour costs (the largest input), payroll taxes, gas, water charges, transport and fuel (including labour-related transport costs), couriers and accountants – all cheaper here than in Maastricht. So what’s going on? Why is the cost of running retail operations more expensive here than in Maastricht?
Rent: rents are the killer. For city centre locations Dublin rents are €2,600 more expensive per square metre; for high street locations (Grafton Street compared to Grote Straat) the differential is a staggering €8,000 per square metre. Even in Outer City Shopping Centres (such as Dundrum), rents are nearly €2,700 dearer here per square metre than the Maastrich equivalent. That’s a lot money flowing out of consumers’, workers’ and owners’ pockets into commercial landlords’.
Banks: Overdrafts are more expensive here, with rates for ‘Under €1 million’ being 9 percent here compared to 6 percent in Maastricht. As the report points out:
‘In terms of the cost of finance, Ireland is the most expensive location for overdrafts and term loans. For example, an overdraft of €500,000 in Ireland would cost a business in Ireland an additional €14,800 per annum in Ireland compared with a similar facility in the Netherlands.’
So, property and banks – where have we heard that story before? There are a few other categories in which Dublin is more expensive than Maastricht.
IT service charges per hour: In Dublin, its €166 per hour; in Maastricht its €32.
Fixed Telephone Costs per minute: in Dublin, its 1 cent more for local calls, 16 cents more for international European calls, and 8 cents more for calls to the US.
Mobile Phone Costs: for local calls its 30 cents more for Dublin and 59 cents more for US calls; calls to international European destinations, however, are 20 cents cheaper in Dublin. After recent price reforms, though, these differentials may have well narrowed.
Electricity Costs per Kilowatt Hour: in Dublin, its 13.9 cents compared to Maastricht’s 11.1 cents. If, however, the Regulator would allow competition in the electricity market, costs in Dublin and Ireland would fall.
Refuse Charges: they’re 42 percent more expensive in Dublin (or €55 more per tonne). However, costs for non-hazardous and biological gate fees are cheaper in Dublin.
Legal Fees: they’re 21 percent more expensive in Dublin.
So what can we conclude? If one were to take rents and bank charges out of the equation, if would be cheaper to run a retail operation in Dublin than in Maastricht. But oh, those landlords and bankers . . .
This should make us cautious when talking about ‘high costs’ in the economy. What we badly need are more forensic examinations of the different economic sectors – of the type that Forfas has carried out with the retail sector. This would raise the debate above the level of assertion and rhetoric and allow us to put forward more effective policies based on concrete evidence, to address those areas where we do fall down.
But as the Forfas report shows – we don’t fall down on all that many areas. And certainly not on labour costs.
The usefulness of the Forfas study - carried out by FGS Consulting – is the detail in which it examines the input costs: labour, rent, utilities, professional fees, transport, etc. It compares Dublin, Cork, and Limerick with Belfast, Manchester, and London. It also compares costs with Maastricht which is useful because costs comparisons are not entangled with currency depreciation. In addition, they survey these costs for department stores, convenience, stores, operations in high streets, retail parks, etc. It’s exhaustive and illuminating.
That the cost of running retail operations in Maastricht is lower than in Dublin shouldn’t surprise us. The cost for running multiples is broadly the same. However, for department stores Maastricht is up to 15 percent cheaper while in retail parks they are 4 percent cheaper. So what accounts for these cost differences? Let’s run through the different categories (the following compares Dublin with Maastricht at 2008 prices).
Labour Costs: If Maastricht operations are cheaper, it’s not because of labour. Forfas surveyed four categories of employees and found that in all categories, wages in Maastricht were higher: Sales Assistant (12.7 percent higher), Customer Sales Rep (26.6), Retail Buyer (19.7) and (9.0). So, we can discount wages as the reason for high operating costs here.
We can also discount employers PRSI contributions: here they are 10.75 percent, in the Netherlands it is 17.28 percent - 61 percent higher. Add all that together and labour costs are substantially less in Dublin (real devaluationists – take note).
Gas: gas prices are 18 percent cheaper in Dublin.
Water charges: water charges are 16 percent cheaper in Dublin.
Transport and Fuel: Inbound freight costs are 52 percent cheaper in Dublin; petrol is 23 percent cheaper while diesel is slightly cheaper at 2 percent. Indeed, labour-related transport costs are 19 percent cheaper here.
Courier Costs: It costs €8 to deliver a package within Dublin’s city centre; in Maastricht the cost is €49.
Accountancy Costs per hour: It’s 7 percent cheaper in Dublin.
So, labour costs (the largest input), payroll taxes, gas, water charges, transport and fuel (including labour-related transport costs), couriers and accountants – all cheaper here than in Maastricht. So what’s going on? Why is the cost of running retail operations more expensive here than in Maastricht?
Rent: rents are the killer. For city centre locations Dublin rents are €2,600 more expensive per square metre; for high street locations (Grafton Street compared to Grote Straat) the differential is a staggering €8,000 per square metre. Even in Outer City Shopping Centres (such as Dundrum), rents are nearly €2,700 dearer here per square metre than the Maastrich equivalent. That’s a lot money flowing out of consumers’, workers’ and owners’ pockets into commercial landlords’.
Banks: Overdrafts are more expensive here, with rates for ‘Under €1 million’ being 9 percent here compared to 6 percent in Maastricht. As the report points out:
‘In terms of the cost of finance, Ireland is the most expensive location for overdrafts and term loans. For example, an overdraft of €500,000 in Ireland would cost a business in Ireland an additional €14,800 per annum in Ireland compared with a similar facility in the Netherlands.’
So, property and banks – where have we heard that story before? There are a few other categories in which Dublin is more expensive than Maastricht.
IT service charges per hour: In Dublin, its €166 per hour; in Maastricht its €32.
Fixed Telephone Costs per minute: in Dublin, its 1 cent more for local calls, 16 cents more for international European calls, and 8 cents more for calls to the US.
Mobile Phone Costs: for local calls its 30 cents more for Dublin and 59 cents more for US calls; calls to international European destinations, however, are 20 cents cheaper in Dublin. After recent price reforms, though, these differentials may have well narrowed.
Electricity Costs per Kilowatt Hour: in Dublin, its 13.9 cents compared to Maastricht’s 11.1 cents. If, however, the Regulator would allow competition in the electricity market, costs in Dublin and Ireland would fall.
Refuse Charges: they’re 42 percent more expensive in Dublin (or €55 more per tonne). However, costs for non-hazardous and biological gate fees are cheaper in Dublin.
Legal Fees: they’re 21 percent more expensive in Dublin.
So what can we conclude? If one were to take rents and bank charges out of the equation, if would be cheaper to run a retail operation in Dublin than in Maastricht. But oh, those landlords and bankers . . .
This should make us cautious when talking about ‘high costs’ in the economy. What we badly need are more forensic examinations of the different economic sectors – of the type that Forfas has carried out with the retail sector. This would raise the debate above the level of assertion and rhetoric and allow us to put forward more effective policies based on concrete evidence, to address those areas where we do fall down.
But as the Forfas report shows – we don’t fall down on all that many areas. And certainly not on labour costs.
Tuesday, 26 January 2010
Banking inquiry: Guest post by Pat Rabbitte TD
Over the next week, progressive-economy@TASC will be carrying a series of guest posts by party spokespersons on the banking inquiry. The first post is by Labour's Pat Rabbitte.
Pat Rabbitte: I agree with the Abbeylara Judgement where the Supreme Court held that a Dail Inquiry "capable of leading to adverse findings of fact and conclusions (including a finding of unlawful killing) as to the personal culpability of an individual not a member of the Oireachtas" is not appropriate. Such an issue is a matter for the Courts, not for parliamentarians.
However I do not agree with the Government spin, retailed by commentators most of whom never read the Abbeylara Judgement, that Abbeylara terminated inquiry by parliamentary committee. It does nothing of the kind. It has left a defect in the law when it exposed that the holding of such an Inquiry "is not within the inherent powers of the Houses of the Oireachtas." The Bill I have published on behalf of the Labour Party corrects that deficit, interalia, and once again enables inquiry by parliamentary committee.
The Oireachtas is perceived as being diminished in relevance, while the executive and judicial arms continue to develop. But we believe that the parliamentary model of inquiry can be a focussed, cost-effective, expeditious and fair means of dealing with issues of important public interest, legislative proposals, public accountability of the executive and its agencies and value for money in respect of public monies, whether voted by the Dáil or raised from other sources.
Our conclusion is that an effective parliamentary power of inquiry is essential to the relevance of parliament to public life in a modern-day representative democracy.
If Parliament does not have a role in investigating the causes of the banking crisis contributing to the worst economic crash in our lifetime then one wonders about the relevance of parliament. The DIRT Inquiry recouped 983 million Euro for the exchequer without making any criminal findings. Such findings are a matter for the courts. Parliament's task is not to look for heads on a plate - let the Office of Corporate Enforcement and the Fraud Squad get on with that - but to understand the reasons why normally conservative long-established banks were reckless to the point of ruin.
Precisely because the economic crisis is so shattering, taxpayers, citizens, SMEs and small shareholders need the catharsis of a public inquiry if we are to successfully confront the challenge of rebuilding our economy.
Pat Rabbitte TD is Labour Party Spokesperson on Justice.
Pat Rabbitte: I agree with the Abbeylara Judgement where the Supreme Court held that a Dail Inquiry "capable of leading to adverse findings of fact and conclusions (including a finding of unlawful killing) as to the personal culpability of an individual not a member of the Oireachtas" is not appropriate. Such an issue is a matter for the Courts, not for parliamentarians.
However I do not agree with the Government spin, retailed by commentators most of whom never read the Abbeylara Judgement, that Abbeylara terminated inquiry by parliamentary committee. It does nothing of the kind. It has left a defect in the law when it exposed that the holding of such an Inquiry "is not within the inherent powers of the Houses of the Oireachtas." The Bill I have published on behalf of the Labour Party corrects that deficit, interalia, and once again enables inquiry by parliamentary committee.
The Oireachtas is perceived as being diminished in relevance, while the executive and judicial arms continue to develop. But we believe that the parliamentary model of inquiry can be a focussed, cost-effective, expeditious and fair means of dealing with issues of important public interest, legislative proposals, public accountability of the executive and its agencies and value for money in respect of public monies, whether voted by the Dáil or raised from other sources.
Our conclusion is that an effective parliamentary power of inquiry is essential to the relevance of parliament to public life in a modern-day representative democracy.
If Parliament does not have a role in investigating the causes of the banking crisis contributing to the worst economic crash in our lifetime then one wonders about the relevance of parliament. The DIRT Inquiry recouped 983 million Euro for the exchequer without making any criminal findings. Such findings are a matter for the courts. Parliament's task is not to look for heads on a plate - let the Office of Corporate Enforcement and the Fraud Squad get on with that - but to understand the reasons why normally conservative long-established banks were reckless to the point of ruin.
Precisely because the economic crisis is so shattering, taxpayers, citizens, SMEs and small shareholders need the catharsis of a public inquiry if we are to successfully confront the challenge of rebuilding our economy.
Pat Rabbitte TD is Labour Party Spokesperson on Justice.
Will the recession increase trade union density?
Rory O'Farrell: On Monday, 25th January, the Irish Times published an article detailing how in 2007 Irish trade union density has continued its downward trend. At the peak of the boom density reached 31 per cent of employees. Should Irish trade unions be worried?
Union density is crucial in maintaining the bargaining power of unions. Member dues pay for the resources of the union. Without a high density in a specific company the threat of strike action is implausible. A low trade union density can lead to allegations that unionised workers are privileged insiders, as can been seen with the scapegoating of public sector workers.
Across Europe, as shown in the ICTWSS database, there has been a general decline in trade union density across Europe. There are three interesting facts however that should receive greater recognition.
1) In Finland, Sweden, and Denmark, countries that use the Ghent system (whereby unions have a roll in administering or paying unemployment benefit), there has not been a strong decline. In fact, in Finland which reintroduced the Ghent system in the 1960s showed a steady increase in union density until the the mid-1990s and now stands at about 71 per cent. Small subsequent decline are related to a weakening of the Ghent system.
2) Another interesting fact (as show for the UK by Willman and Bryson, 2007) is that union density has remained higher in the public sector.
3) In the UK the main reason unions declined was not due to deunionisation, but a failure to organise in new establishments (Machin, 2000).
Many explantions have been put forward for the decline in union density, such as changing composition of industry and globalisation. These can only tell part of the story. In an interesting (though technical) paper by Edgar Preugschat an alternative explanation is given. Since the 1970s there has been an increase in the rate of firm creation and destruction. The days of a ‘job for life’ are over. This affects unions negatively for the following reason. It is costly (in both time and resources) for unions to recruit members. Once a worker joins a union they usually stay in the union while they are still in their job, but leave if they become unemployed. In the past if someone had a job for life, then once successfully recruited the union had a member for life. However, if someone loses their job and leaves the union, when they finally find a new job the union will again have to go through time and effort to recruit the member into the union. Rather than having a member for life the union will repeatedly have to recruit the worker, and there will always be a time lag when the worker has perhaps ‘not gotten round to’ rejoining the union once in employment. Also, once a union has a presence in a firm it is easier for them to recruit members within that firm. However, as the rate of firm creation and destruction increases unions will have to try organise in ‘fresh’ firms which may be hostile to the union organising activity. This places a major drain on the organising effort of unions.
Though union density decreased until 2007, what has happened since? Unfortunately data is hard to come by. However, within individual sectors we can expect net union density to first increase during the recession as union members are more successful at keeping their jobs due to the efforts of their unions (though there has been mixed evidence in the past). The overall effect of the downturn on national union density could be negative if job losses in relatively high density sectors (such as manufacturing or banking) are disproportionate to job losses in the whole economy, but overall I expect union density to at first increase slightly. Once job creation eventually begins union density will fall again as unions will have to make a push to recruit these newly employed workers and organise new firms. As the public sector is not subject to job destruction and creation to the same extent, union density will remain high in the public sector, but decrease in the private sector. This will again leave unions open to scapegoating as ‘vested interest groups’.
While unions will never affect the rate of firm creation they can still counteract its effects on union density. As mentioned before, countries using the Ghent system have maintained high density. One explanation is that unemployed workers usually do not leave the union (as they receive unemployment benefit from the union). Ghent country unions are more likely to have a member for life. While implementing the Ghent system is unlikely in Ireland unions can take measures to keep unemployed members in the union. Unions can offer free membership (rather than reduced rates) to workers who lose their jobs, and also perhaps give some other benefits to maintain their active membership. While this may have short term costs in the long term it would be to the benefit of the union. Having unemployed member with full voting rights, and perhaps even an ‘unemployed members branch’ would also counter allegations of unions representing privileged insiders. Finally, it would make recruitment far easier.
There could be some problems, such as how to deal with a situation where a formerly unemployed SIPTU member gets a job in a firm represented by UNITE. Should that worker leave SIPTU and join UNITE? The ICTU could perhaps maintain a membership database to deal with such issues. Also free membership to unemployed members would be of greater benefit to larger unions (such as SIPTU) or unions whose members, if they become unemployed, are likely to get their next job in a firm represented by the same union.
However, despite any problems, the benefits are great. Hopefully the labour market will have recovered by 2013, and Irish trade unionism will follow quickly behind.
Machin, S., (2000). Union decline in Britain, British Journal of Industrial Relations, 38(4): 631-645.
Willman, P., and Bryson, A., (200). Union Organization in Great Britain, Journal of Labor Research, 28(1):93-115
Union density is crucial in maintaining the bargaining power of unions. Member dues pay for the resources of the union. Without a high density in a specific company the threat of strike action is implausible. A low trade union density can lead to allegations that unionised workers are privileged insiders, as can been seen with the scapegoating of public sector workers.
Across Europe, as shown in the ICTWSS database, there has been a general decline in trade union density across Europe. There are three interesting facts however that should receive greater recognition.
1) In Finland, Sweden, and Denmark, countries that use the Ghent system (whereby unions have a roll in administering or paying unemployment benefit), there has not been a strong decline. In fact, in Finland which reintroduced the Ghent system in the 1960s showed a steady increase in union density until the the mid-1990s and now stands at about 71 per cent. Small subsequent decline are related to a weakening of the Ghent system.
2) Another interesting fact (as show for the UK by Willman and Bryson, 2007) is that union density has remained higher in the public sector.
3) In the UK the main reason unions declined was not due to deunionisation, but a failure to organise in new establishments (Machin, 2000).
Many explantions have been put forward for the decline in union density, such as changing composition of industry and globalisation. These can only tell part of the story. In an interesting (though technical) paper by Edgar Preugschat an alternative explanation is given. Since the 1970s there has been an increase in the rate of firm creation and destruction. The days of a ‘job for life’ are over. This affects unions negatively for the following reason. It is costly (in both time and resources) for unions to recruit members. Once a worker joins a union they usually stay in the union while they are still in their job, but leave if they become unemployed. In the past if someone had a job for life, then once successfully recruited the union had a member for life. However, if someone loses their job and leaves the union, when they finally find a new job the union will again have to go through time and effort to recruit the member into the union. Rather than having a member for life the union will repeatedly have to recruit the worker, and there will always be a time lag when the worker has perhaps ‘not gotten round to’ rejoining the union once in employment. Also, once a union has a presence in a firm it is easier for them to recruit members within that firm. However, as the rate of firm creation and destruction increases unions will have to try organise in ‘fresh’ firms which may be hostile to the union organising activity. This places a major drain on the organising effort of unions.
Though union density decreased until 2007, what has happened since? Unfortunately data is hard to come by. However, within individual sectors we can expect net union density to first increase during the recession as union members are more successful at keeping their jobs due to the efforts of their unions (though there has been mixed evidence in the past). The overall effect of the downturn on national union density could be negative if job losses in relatively high density sectors (such as manufacturing or banking) are disproportionate to job losses in the whole economy, but overall I expect union density to at first increase slightly. Once job creation eventually begins union density will fall again as unions will have to make a push to recruit these newly employed workers and organise new firms. As the public sector is not subject to job destruction and creation to the same extent, union density will remain high in the public sector, but decrease in the private sector. This will again leave unions open to scapegoating as ‘vested interest groups’.
While unions will never affect the rate of firm creation they can still counteract its effects on union density. As mentioned before, countries using the Ghent system have maintained high density. One explanation is that unemployed workers usually do not leave the union (as they receive unemployment benefit from the union). Ghent country unions are more likely to have a member for life. While implementing the Ghent system is unlikely in Ireland unions can take measures to keep unemployed members in the union. Unions can offer free membership (rather than reduced rates) to workers who lose their jobs, and also perhaps give some other benefits to maintain their active membership. While this may have short term costs in the long term it would be to the benefit of the union. Having unemployed member with full voting rights, and perhaps even an ‘unemployed members branch’ would also counter allegations of unions representing privileged insiders. Finally, it would make recruitment far easier.
There could be some problems, such as how to deal with a situation where a formerly unemployed SIPTU member gets a job in a firm represented by UNITE. Should that worker leave SIPTU and join UNITE? The ICTU could perhaps maintain a membership database to deal with such issues. Also free membership to unemployed members would be of greater benefit to larger unions (such as SIPTU) or unions whose members, if they become unemployed, are likely to get their next job in a firm represented by the same union.
However, despite any problems, the benefits are great. Hopefully the labour market will have recovered by 2013, and Irish trade unionism will follow quickly behind.
Machin, S., (2000). Union decline in Britain, British Journal of Industrial Relations, 38(4): 631-645.
Willman, P., and Bryson, A., (200). Union Organization in Great Britain, Journal of Labor Research, 28(1):93-115
Monday, 25 January 2010
‘Ireland now needs to generate an internal devaluation, with prices and wages falling’
Slí Eile: So runs the recent ESRI Quarterly Economic Commentary (page 50).
A lot of the debate on competition and competitiveness is narrowly constrained to a view of the world that looks something like the world of ‘perfect competition’ learned for Leaving Certificate Economics: product homogeneity, perfect information, no barriers to industry entry or exit, costless transport etc. One of the features of the economy in the South of Ireland is not only its small size and trade openness but the fact that it operates with relatively diverse sub-economies.
Some recent posts and discussions on this Site have brought out the nature of these sub-economies:
* A heavily export-orientated multinational sectors specialising in certain market niches – pharma, chemicals, ICT etc, operating price transferring and profit displacement and with relatively lower labour cost input
* Some industries geared towards particular markets susceptible to currency movements (especially Sterling)
* A significant non-traded sector here wages, rents and profits are set domestically.
In discussing and measuring ‘competitiveness’ or any other macro-level phenomenon it is necessary to disaggregate somewhat. This is not to deny:
- The importance of labour costs in the total cost schedule facing enterprises
- The inter-connectedness between costs in the non-trade sector and the traded sectors
Has Ireland been losing competitiveness over the last decade? This turns out to be not so straight forward. As other posts have shown, the National Council for Competitiveness does not focus on wage cost competitiveness to anything like the extent that some commentators and media people do. The NCC Annual Competitiveness Report 2009 Volume 1: Benchmarking Ireland's Performance published last year devotes 130 pages including copious indicators and graphs to measure competitiveness (Volume 1 has the data – the recent Volume 2 published earlier this month focuses more on policy implications).
Labour costs feature in the NCC data and discourse – but very much as only one part
See page 65. There is a nice colour-coded display of green (good), orange (risky) and red (problematic) warning ‘indicators’. Unit costs in manufacturing industry is coded orange. However, on ‘non-pay’ costs the indicators are mostly red. They are:
In order for the economy to make the necessary transition from a reliance on domestic demand to sustainable export-led growth in the medium term, policies need to facilitate the convergence of Irish costs, charges, professional fees, rents and incomes/wages towards the levels of our trading partners.
Productivity and not just wage levels are important. Growth in productivity has been poor in the 2004-2008 period but there is evidence that the position has improved since 2008. For many exporting firms, labour costs account for over half of their input costs. While Irish pay and income levels are moderate when compared to other developed high income economies, wage inflation in Ireland was running at up to 50 percent higher than the Eurozone average during the 2004-2007 period. However, growth in labour costs slowed significantly in 2008 in Ireland relative to the Eurozone.
One way of calculating an overall measure of price competitiveness is to use the the Central Bank Harmonised Competitiveness Indictor (HCI). The value for HCI is determined by changes in consumer and producer prices relative to the main trading partners for this State and adjusted for change in the value of the Euro relative to other major currencies. The value of HCI (deflated for consumer prices) rose from 100 in 1999 to a peak value of 126 in mid-2008 and has fallen back to 121 in December 2009. By contrast, the value was just under 100 in December 2009 for the Eurozone countries (ECB Statistical Data Warehouse).
However, much of the increase in this Indicator from mid-2006 to mid-2008 was driven by the strong appreciation in the value of the Euro against both Sterling and the US Dollar.
See Box B in the CBI Quarterly Bulletin 2007 (2)
The US Bureau of Labor Statistics regularly publishes comparative data on pay rates. Hourly compensation rates here were, in 2007, above US values (Ireland = 117 and US = 100). However, the Eurozone average was 133. (Source: All Employees: Indexes of hourly compensation costs in U.S. dollars in manufacturing, 32 countries or areas and selected economic groups, 1996-2007)
Garret Fitzgerald’s claims that Ireland has been losing competitiveness in the last decade as signalled by loss of world market share in goods industries. However, he concedes that Services have been winning out as goods industries have been displaced. Overall, the fall in exports in 2008 was surprisingly small, here (2.75% according to the ESRI), compared to other economies in the midst of a world depression. Not grounds for complacency – but surely not indicative of a sharp deterioration in competitiveness driven by rising costs in the non-traded sector?
The picture on exports is very mixed as the ESRI has pointed out in his recent
At least a significant part of inflation in wage costs in the 1997-2007 period was driven by the property bubble – and that gives another story.
but, the ESRI give the show away on page 32 of the Winter QEC (Table 11)
[The Table shows the share of labour in GNP rising from 47.7% in 2005 to 54.5% in 2009 and then falling back to 52.5% in 2010.]
This only goes to show that some things never change:
Profits drive economic activity
Profits decline in some sectors (like banking) and can trigger crises over in the real economy
Crises lower profits
To restore profits wages must be cut
This is the key to being competitive
Cutting wages, restoring profit levels.
Lets not mince words here. We are in the middle of a calculated competitive devaluation where wage labour and people on social welfare are seeing adjustments to restore profit levels and reassure the markets and raise confidence of investors and the ubiquitous god ‘consumer’. All the talk about pricing ourselves back into world markets is a proxy for shifting the share of national income towards profits as the banking and property bubbles burst and the real economy adjusts.
A lot of the debate on competition and competitiveness is narrowly constrained to a view of the world that looks something like the world of ‘perfect competition’ learned for Leaving Certificate Economics: product homogeneity, perfect information, no barriers to industry entry or exit, costless transport etc. One of the features of the economy in the South of Ireland is not only its small size and trade openness but the fact that it operates with relatively diverse sub-economies.
Some recent posts and discussions on this Site have brought out the nature of these sub-economies:
* A heavily export-orientated multinational sectors specialising in certain market niches – pharma, chemicals, ICT etc, operating price transferring and profit displacement and with relatively lower labour cost input
* Some industries geared towards particular markets susceptible to currency movements (especially Sterling)
* A significant non-traded sector here wages, rents and profits are set domestically.
In discussing and measuring ‘competitiveness’ or any other macro-level phenomenon it is necessary to disaggregate somewhat. This is not to deny:
- The importance of labour costs in the total cost schedule facing enterprises
- The inter-connectedness between costs in the non-trade sector and the traded sectors
Has Ireland been losing competitiveness over the last decade? This turns out to be not so straight forward. As other posts have shown, the National Council for Competitiveness does not focus on wage cost competitiveness to anything like the extent that some commentators and media people do. The NCC Annual Competitiveness Report 2009 Volume 1: Benchmarking Ireland's Performance published last year devotes 130 pages including copious indicators and graphs to measure competitiveness (Volume 1 has the data – the recent Volume 2 published earlier this month focuses more on policy implications).
Labour costs feature in the NCC data and discourse – but very much as only one part
See page 65. There is a nice colour-coded display of green (good), orange (risky) and red (problematic) warning ‘indicators’. Unit costs in manufacturing industry is coded orange. However, on ‘non-pay’ costs the indicators are mostly red. They are:
- Rents of industrial sites
- Rents of office sites
- Cost of high-speed internet
- Electricity
- Waste disposal
- Accountancy fees
- IT consultancy fees
- Legal fees
- Childcare costs
- insurance
In order for the economy to make the necessary transition from a reliance on domestic demand to sustainable export-led growth in the medium term, policies need to facilitate the convergence of Irish costs, charges, professional fees, rents and incomes/wages towards the levels of our trading partners.
Productivity and not just wage levels are important. Growth in productivity has been poor in the 2004-2008 period but there is evidence that the position has improved since 2008. For many exporting firms, labour costs account for over half of their input costs. While Irish pay and income levels are moderate when compared to other developed high income economies, wage inflation in Ireland was running at up to 50 percent higher than the Eurozone average during the 2004-2007 period. However, growth in labour costs slowed significantly in 2008 in Ireland relative to the Eurozone.
One way of calculating an overall measure of price competitiveness is to use the the Central Bank Harmonised Competitiveness Indictor (HCI). The value for HCI is determined by changes in consumer and producer prices relative to the main trading partners for this State and adjusted for change in the value of the Euro relative to other major currencies. The value of HCI (deflated for consumer prices) rose from 100 in 1999 to a peak value of 126 in mid-2008 and has fallen back to 121 in December 2009. By contrast, the value was just under 100 in December 2009 for the Eurozone countries (ECB Statistical Data Warehouse).
However, much of the increase in this Indicator from mid-2006 to mid-2008 was driven by the strong appreciation in the value of the Euro against both Sterling and the US Dollar.
See Box B in the CBI Quarterly Bulletin 2007 (2)
The US Bureau of Labor Statistics regularly publishes comparative data on pay rates. Hourly compensation rates here were, in 2007, above US values (Ireland = 117 and US = 100). However, the Eurozone average was 133. (Source: All Employees: Indexes of hourly compensation costs in U.S. dollars in manufacturing, 32 countries or areas and selected economic groups, 1996-2007)
Garret Fitzgerald’s claims that Ireland has been losing competitiveness in the last decade as signalled by loss of world market share in goods industries. However, he concedes that Services have been winning out as goods industries have been displaced. Overall, the fall in exports in 2008 was surprisingly small, here (2.75% according to the ESRI), compared to other economies in the midst of a world depression. Not grounds for complacency – but surely not indicative of a sharp deterioration in competitiveness driven by rising costs in the non-traded sector?
The picture on exports is very mixed as the ESRI has pointed out in his recent
Quarterly:Exports of chemicals and related products increased by 12 per cent, driven by strong growth in pharmaceutical products and organic chemicals. Across the other broad categories, there were significant declines in the exports of electrical machinery and computer equipment; the latter is likely in part to reflect the relocation of Dell to Poland. Furthermore, there has been a fall in exports to the UK of over 16 per cent over the same period, this is most likely driven by the recent weakness in Sterling together with the weak performance of the UK economy.
At least a significant part of inflation in wage costs in the 1997-2007 period was driven by the property bubble – and that gives another story.
but, the ESRI give the show away on page 32 of the Winter QEC (Table 11)
Finally, the last line in the table can be viewed as an indicator of competitiveness. While it is not the case that there is some target level for labour’s share of output, the increase in the value of the variable into 2009 points to declining competitiveness. If our forecasts are correct, and in particular if wages fall by 2½ per cent in 2010, there will be a significant improvement in competitiveness and this is reflected in the fall in labour’s share in 2010 relative to 2009.
[The Table shows the share of labour in GNP rising from 47.7% in 2005 to 54.5% in 2009 and then falling back to 52.5% in 2010.]
This only goes to show that some things never change:
Profits drive economic activity
Profits decline in some sectors (like banking) and can trigger crises over in the real economy
Crises lower profits
To restore profits wages must be cut
This is the key to being competitive
Cutting wages, restoring profit levels.
Lets not mince words here. We are in the middle of a calculated competitive devaluation where wage labour and people on social welfare are seeing adjustments to restore profit levels and reassure the markets and raise confidence of investors and the ubiquitous god ‘consumer’. All the talk about pricing ourselves back into world markets is a proxy for shifting the share of national income towards profits as the banking and property bubbles burst and the real economy adjusts.
More Light Touch Regulation? Dublin's Waste Collection Market
Eoin Reeves: In late December 2009 the Irish Times reported that High Court judge (Mr Justice Liam McKechnie) ruled that Dublin’s four local authorities had breached competition law by abusing their dominant position in the household waste collection market in a bid to remove rival private operators. According to the Irish Times:
“Mr Justice Liam McKechnie today quashed a variation to the Dublin region waste management plan whereby only the councils, or contractors appointed by them, could collect household waste”.
A number of interesting issues arise from this particular ruling.
First, according to the Irish Times (December 21st) the judge stated that the actions of the local authorities:
“substantially strengthen the position of the local authorities and substantially influence the structure of the market to the detriment of competition.”
My understanding is that the local authorities sought to exercise more control over the waste collection market by putting contract(s) for waste collection out to competitive tender. The successful bidder would then enjoy monopoly rights to collect waste in accordance with a written contract. This would replace the current system where private operators such as Panda and Greenstar collect waste on the basis of permits (not contracts) issued by the local authorities. These private collectors then compete against each other for customers. Would the change to competitive tendering influence the structure of the market to the detriment of competition as the judge stated?
In my view this argument is very questionable and I have strong reservations about the soundness of the judgement (as reported in the media). It is not clear that the judge has made the distinction between competition in the market and competition for the market.
When the privatisation of refuse collection services came into vogue in the Great Britain in the late 1980s the proponents of privatisation argued that the benefits of competition could be reaped via competitive tendering (competition for the market) and that this was an efficient substitute for competition in the market. In terms of cost efficiency they were proved correct with a host of empirical studies demonstrating that significant costs savings (between 15%-20% on average) were made by moving from direct public provision to private provision after competitive tendering (notwithstanding issues in relation to deterioration of working conditions etc). A key point was that the competitive tension inherent in the tendering process was the key to efficiency gains. These gains were not attributable to privatisation per se. This was evident in cases where local authorities won contracts and also delivered cost savings after competitive tendering.
For a service like refuse collection the argument for competitive tendering is compelling in terms of cost savings. Moreover, the nature of the service is straightforward so writing and enforcing contracts should not be problematic. The contract serves as an instrument for regulating a market where externalities are potentially significant (e.g. illegal dumping in the face of prices set by the private sector) and where market concentration can emerge as dominant private operators squeeze out rivals. The implication of the ‘McKechnie ruling’ is that a market free-for-all is necessary if arrangements are not to be anti-competitive. This results in a light-touch form of regulation compared to contracting out.
It is interesting the note that the Competition Authority has examined this issue in a document published in 2005. Mr. Paul Gorecki, who was then Director of the Monopolies Division in The Competition Authority summarised the findings of the report as follows
“The market for household waste collection is not working well for consumers. Competition law is neither an appropriate or effective remedy in this case. However extensive international experience demonstrates that competitive tendering is the best method of ensuring that household waste collection providers deliver consumers good service at competitive prices.”
Assuming that Dublin’s local authorities were indeed seeking to replace a permit system with competitive tendering there are serious question around the economic reasoning behind the McKechnie ruling.
Some other issues arose from this ruling. These concern the PPP contract for the Poolbeg Incinerator as well as the role of consultants and their influence in shaping public policy. I hope to return to these issues in later posts.
“Mr Justice Liam McKechnie today quashed a variation to the Dublin region waste management plan whereby only the councils, or contractors appointed by them, could collect household waste”.
A number of interesting issues arise from this particular ruling.
First, according to the Irish Times (December 21st) the judge stated that the actions of the local authorities:
“substantially strengthen the position of the local authorities and substantially influence the structure of the market to the detriment of competition.”
My understanding is that the local authorities sought to exercise more control over the waste collection market by putting contract(s) for waste collection out to competitive tender. The successful bidder would then enjoy monopoly rights to collect waste in accordance with a written contract. This would replace the current system where private operators such as Panda and Greenstar collect waste on the basis of permits (not contracts) issued by the local authorities. These private collectors then compete against each other for customers. Would the change to competitive tendering influence the structure of the market to the detriment of competition as the judge stated?
In my view this argument is very questionable and I have strong reservations about the soundness of the judgement (as reported in the media). It is not clear that the judge has made the distinction between competition in the market and competition for the market.
When the privatisation of refuse collection services came into vogue in the Great Britain in the late 1980s the proponents of privatisation argued that the benefits of competition could be reaped via competitive tendering (competition for the market) and that this was an efficient substitute for competition in the market. In terms of cost efficiency they were proved correct with a host of empirical studies demonstrating that significant costs savings (between 15%-20% on average) were made by moving from direct public provision to private provision after competitive tendering (notwithstanding issues in relation to deterioration of working conditions etc). A key point was that the competitive tension inherent in the tendering process was the key to efficiency gains. These gains were not attributable to privatisation per se. This was evident in cases where local authorities won contracts and also delivered cost savings after competitive tendering.
For a service like refuse collection the argument for competitive tendering is compelling in terms of cost savings. Moreover, the nature of the service is straightforward so writing and enforcing contracts should not be problematic. The contract serves as an instrument for regulating a market where externalities are potentially significant (e.g. illegal dumping in the face of prices set by the private sector) and where market concentration can emerge as dominant private operators squeeze out rivals. The implication of the ‘McKechnie ruling’ is that a market free-for-all is necessary if arrangements are not to be anti-competitive. This results in a light-touch form of regulation compared to contracting out.
It is interesting the note that the Competition Authority has examined this issue in a document published in 2005. Mr. Paul Gorecki, who was then Director of the Monopolies Division in The Competition Authority summarised the findings of the report as follows
“The market for household waste collection is not working well for consumers. Competition law is neither an appropriate or effective remedy in this case. However extensive international experience demonstrates that competitive tendering is the best method of ensuring that household waste collection providers deliver consumers good service at competitive prices.”
Assuming that Dublin’s local authorities were indeed seeking to replace a permit system with competitive tendering there are serious question around the economic reasoning behind the McKechnie ruling.
Some other issues arose from this ruling. These concern the PPP contract for the Poolbeg Incinerator as well as the role of consultants and their influence in shaping public policy. I hope to return to these issues in later posts.
Sunday, 24 January 2010
Boilscíu
An Saoi: The recently published inflation figures set me thinking as to how they are calculated here and in various other countries. Thankfully each country publishes the weightings it gives under various headings based on their domestic baskets. I have set out in a Table below the weightings for Ireland and four other countries under the general headings used.
The differences in some cases are extraordinary, reflecting cultural and taxation differences. The Irish weighting for alcohol & tobacco consumption is over 20% compared to just 8% for the Germans and 6% for Norwegians. This is partially a reflection on taxation however it is mainly a cultural issue. Are we really that dependent on legal drugs?
The other area where Ireland is out of kilter is housing. Housing & related utility costs have a weighting of over 30% in Germany & Norway while only 16.5% in Ireland. The lucky Italians allocate just 10% of their expenditure on such costs. And they have the sun for most of the year! Taxation or in this case the lack of it keeps Irish housing costs artificially low.
With all of the money the Italians save on housing, no wonder they are the best dressed people in Europe. They allocate nearly twice as much of their expenditure on clothing as the dowdy Germans. Of course unlike us and the Brits, they have not discovered the pleasures of throwaway clothing from Penny’s/Primark! They also spend far more than anyone else on food, nearly 17% of expenditure.
Irish consumer expenditure on education accounts for just 2% of our spending, but the Norwegians, with a similar number of young people spend just .24%. Private schools and rugby are clearly unknown in Oslo, Tromsø & Bergen. We also spend far more on communications (for poorer services) than anyone else.
Amusing as the differences and possible stereotypes are, e.g. the Irish are clearly scruffy drunks and the Italians spend all their time in the kitchen wearing Armani, there was a more serious reason for looking at the figures.
Housing and related costs accounted for 70% of the fall in prices in 2009. We still pay far more than citizens in most other countries for goods and services. There must remain considerable room for price falls in 2010 and even 2011 as our prices move closer to European norms. Changes in taxation, such as further lowering of VAT and replacing it with property based taxation can help. I must also mention once more commercial rents which remain the largest cost for many small businesses.
There is a serious challenge for a Government to manage such an adjustment without sending us into a Japanese style spiral of deflationary depression.
The other area where Ireland is out of kilter is housing. Housing & related utility costs have a weighting of over 30% in Germany & Norway while only 16.5% in Ireland. The lucky Italians allocate just 10% of their expenditure on such costs. And they have the sun for most of the year! Taxation or in this case the lack of it keeps Irish housing costs artificially low.
With all of the money the Italians save on housing, no wonder they are the best dressed people in Europe. They allocate nearly twice as much of their expenditure on clothing as the dowdy Germans. Of course unlike us and the Brits, they have not discovered the pleasures of throwaway clothing from Penny’s/Primark! They also spend far more than anyone else on food, nearly 17% of expenditure.
Irish consumer expenditure on education accounts for just 2% of our spending, but the Norwegians, with a similar number of young people spend just .24%. Private schools and rugby are clearly unknown in Oslo, Tromsø & Bergen. We also spend far more on communications (for poorer services) than anyone else.
Amusing as the differences and possible stereotypes are, e.g. the Irish are clearly scruffy drunks and the Italians spend all their time in the kitchen wearing Armani, there was a more serious reason for looking at the figures.
Housing and related costs accounted for 70% of the fall in prices in 2009. We still pay far more than citizens in most other countries for goods and services. There must remain considerable room for price falls in 2010 and even 2011 as our prices move closer to European norms. Changes in taxation, such as further lowering of VAT and replacing it with property based taxation can help. I must also mention once more commercial rents which remain the largest cost for many small businesses.
There is a serious challenge for a Government to manage such an adjustment without sending us into a Japanese style spiral of deflationary depression.
Saturday, 23 January 2010
VAT and local authorities
An Saoi: We were directed by Europe some time ago that VAT must be charged by Local Authorities on certain services such as parking, waste disposal and entry into leisure facilities. Competitors had to charge it and as such it is appropriate that State & Municipal bodies should have to do so also. It was well know that this was going to occur and just as happened in relation to toll charges, we dragged our feet. The original Court Case in relation to those charges took place in 1997 and the law was finally amended here from 1st July 2001.
The extension of VAT to these services is an opportunity to reduce the standard rate of VAT to 20% and ensure that the adjustment is at least neutral to the economy. Adding VAT to those charges is very close to pure income for the Government as the allowable VAT inputs credits are very small.
A further reduction in VAT with effect from 1st July 2010 is just what a tired economy might need.
The extension of VAT to these services is an opportunity to reduce the standard rate of VAT to 20% and ensure that the adjustment is at least neutral to the economy. Adding VAT to those charges is very close to pure income for the Government as the allowable VAT inputs credits are very small.
A further reduction in VAT with effect from 1st July 2010 is just what a tired economy might need.
Friday, 22 January 2010
Counting Vacant Houses (And Their Cost)
Nat O'Connor: A lack of reliable information about the housing market contributed to the housing bubble and subsequent crash.
The National Institute for Regional and Spatial Analysis (NIRSA), based in NUI Maynooth, estimates that 302,625 housing units lie vacant. Yet, Michael Finneran TD (Minister for State with responsibility for Housing) is reported as recently telling cabinet that there were 100,000-140,000 empty housing units. And the construction industry claims there are only 40,000.
This level of disparity about the basic facts is madness.
You can read about the NIRSA report in the Irish Times and more details of their calculations in a blog piece by the report's authors (one of whom is NIRSA's Director).
We knew something was going badly wrong in the housing market when supply grew, yet prices also rose enormously. The growth in land prices fuelled this, but in hindsight the lack of public information on the housing market allowed developers to time the drip-fed of new housing units into the market to maximise profits.
Accurate statistics about the number of empty housing units in the country could have helped people calculate realistic house prices before and during the bubble. Such statistics might also have helped planning. Instead, we have now ghost estates where few people want to live.
Like the follies built by poorhouse workers during the famine, it seems that these estates have no real utility and there has been talk of demolishing some of them. I'd like to know more about the arguments for this. Are they so sub-standard? Are they so far removed from good roads and potential jobs? Knocking down some of these estates could also be seen as an attempt to decrease supply in the market and thus bolster house prices across the board.
What is the loss to the State if NAMA accepts some of these estates (even with a discount) in exchange for writing off bad bank debt? If even a small number of them are demolished, than the remaining land value (minus the cost of the demolision and waste disposal) will not be worth whatever bad debt NAMA would write off against them at a 30 per cent discount. Alternatively, the long-term consequences of trying to make some of these estates viable will also involve annual costs to the State. For example, if planned badly (or with inadequate resources) the human and financial costs of turning some of them into social housing ghettos could be high.
Then again, many housing units acquired by NAMA could be an important element in moving thousands of people off the waiting lists. However, if it can be shown that it is better to demolish some of them, it would also be better to plan this rationalisation through a coherent national housing strategy, and for NAMA to be barred from accepting them into State ownership in exchange for bad debt.
Meanwhile, for ordinary workers who are living the consequences of the failure to regulate the housing market, Citizens Information have teamed up with MABS to put the most salient advice on a microsite: keepingyourhome.ie
It is obvious that many families are under serious pressure to keep their homes. Many more will be paying rent and mortgages (for years to come) at rates that are way over the one third of net income threshold for 'affordability'.
Yet, at the same time, there are over 300,000 vacant housing units in Ireland.
The National Institute for Regional and Spatial Analysis (NIRSA), based in NUI Maynooth, estimates that 302,625 housing units lie vacant. Yet, Michael Finneran TD (Minister for State with responsibility for Housing) is reported as recently telling cabinet that there were 100,000-140,000 empty housing units. And the construction industry claims there are only 40,000.
This level of disparity about the basic facts is madness.
You can read about the NIRSA report in the Irish Times and more details of their calculations in a blog piece by the report's authors (one of whom is NIRSA's Director).
We knew something was going badly wrong in the housing market when supply grew, yet prices also rose enormously. The growth in land prices fuelled this, but in hindsight the lack of public information on the housing market allowed developers to time the drip-fed of new housing units into the market to maximise profits.
Accurate statistics about the number of empty housing units in the country could have helped people calculate realistic house prices before and during the bubble. Such statistics might also have helped planning. Instead, we have now ghost estates where few people want to live.
Like the follies built by poorhouse workers during the famine, it seems that these estates have no real utility and there has been talk of demolishing some of them. I'd like to know more about the arguments for this. Are they so sub-standard? Are they so far removed from good roads and potential jobs? Knocking down some of these estates could also be seen as an attempt to decrease supply in the market and thus bolster house prices across the board.
What is the loss to the State if NAMA accepts some of these estates (even with a discount) in exchange for writing off bad bank debt? If even a small number of them are demolished, than the remaining land value (minus the cost of the demolision and waste disposal) will not be worth whatever bad debt NAMA would write off against them at a 30 per cent discount. Alternatively, the long-term consequences of trying to make some of these estates viable will also involve annual costs to the State. For example, if planned badly (or with inadequate resources) the human and financial costs of turning some of them into social housing ghettos could be high.
Then again, many housing units acquired by NAMA could be an important element in moving thousands of people off the waiting lists. However, if it can be shown that it is better to demolish some of them, it would also be better to plan this rationalisation through a coherent national housing strategy, and for NAMA to be barred from accepting them into State ownership in exchange for bad debt.
Meanwhile, for ordinary workers who are living the consequences of the failure to regulate the housing market, Citizens Information have teamed up with MABS to put the most salient advice on a microsite: keepingyourhome.ie
It is obvious that many families are under serious pressure to keep their homes. Many more will be paying rent and mortgages (for years to come) at rates that are way over the one third of net income threshold for 'affordability'.
Yet, at the same time, there are over 300,000 vacant housing units in Ireland.
Multinationals and Cheap Labour: Myths and Facts
Proinnsias Breathnach: The extraordinarily blinkered and simplistic preoccupation of Irish economists with labour costs was once again in evidence in a book review by Michael Casey, former Chief Economist of the Central Bank, published in the January 4 issue of the Irish Times. Reviewing Graham Turner’s No way to run an economy (Pluto Press), Casey offered the following observation: “multinationals are now more or less beyond the control of the authorities and will shift production to any country in the world to avail of lower wage costs”. This gives the impression that the main consideration of multinational companies (MNCs) in choosing overseas locations is wage costs.
In fact, when one strips out investment in oil-rich economies such as Saudi Arabia and the United Arab Emirates, tax havens such as the Cayman and Virgin islands and the traditional four Asian tigers (Hong Kong, Taiwan, Singapore and South Korea – still included among the “developing economies” by the World Bank etc), the proportion of global foreign direct investment stock located in low-wage economies is of the order of 15%, and even in these cases, much of the investment is oriented towards serving local markets (China, India, Mexico, Brazil) rather than exploiting cheap labour. The fact is that the vast bulk of overseas investment by MNCs is located in high-wage economies, demonstrating that low wages are, at best, a minor factor in influencing multinational investment patterns.
In the same book review, Casey offers a second observation which is so off the mark as to be downright risible: “The lack of demand in the US economy is also due to the compression of wages. This was caused by multinationals leaving en masse for cheap-labour countries.” That someone who is currently a board member of the IMF could offer such a simplistic and erroneous view of what is a highly complex phenomenon is actually quite disturbing.
The idea that US multinationals have been relocating jobs en masse to low-wage economies is simply not true. For a start, the great bulk (70%) of employment in US MNCs is actually located within the USA itself. An even greater proportion (80%) of overseas employment in US MNCs in located in other developed countries. This is reflected in the fact that (according to UNCTAD data) the average overseas employee of a US MNC earned almost $38,000 in wages/salaries in 2005 i.e. 86% of the average salary of all US employees in that year. These are crude averages, but the orders of magnitude are nonetheless indicative. When one allows for overseas investments by US MNCs which are primarily designed to serve local markets, it is likely that the search for cheap labour accounts for less than ten per cent of all overseas employment in US MNCs.
In 2005, overseas employment in US MNCs was the equivalent of 8 per cent of total employment within the USA itself. This suggests that, if all jobs relocated overseas to access cheap labour were to be repatriated, it would increase employment in the USA by less than one per cent. Clearly, such relocations have had, at best, a marginal impact on US wage levels. If Michael Casey is looking for causes for the compression of US wage rates (which are lower now in real terms than they were forty years ago), he might do better to look at other factors such as large-scale immigration of unskilled workers from abroad, low education and skill levels among large swathes of the indigenous population, anti-trade union legislation and the absence of the social protections for marginal groups which are found in more civilised societies elsewhere.
In fact, when one strips out investment in oil-rich economies such as Saudi Arabia and the United Arab Emirates, tax havens such as the Cayman and Virgin islands and the traditional four Asian tigers (Hong Kong, Taiwan, Singapore and South Korea – still included among the “developing economies” by the World Bank etc), the proportion of global foreign direct investment stock located in low-wage economies is of the order of 15%, and even in these cases, much of the investment is oriented towards serving local markets (China, India, Mexico, Brazil) rather than exploiting cheap labour. The fact is that the vast bulk of overseas investment by MNCs is located in high-wage economies, demonstrating that low wages are, at best, a minor factor in influencing multinational investment patterns.
In the same book review, Casey offers a second observation which is so off the mark as to be downright risible: “The lack of demand in the US economy is also due to the compression of wages. This was caused by multinationals leaving en masse for cheap-labour countries.” That someone who is currently a board member of the IMF could offer such a simplistic and erroneous view of what is a highly complex phenomenon is actually quite disturbing.
The idea that US multinationals have been relocating jobs en masse to low-wage economies is simply not true. For a start, the great bulk (70%) of employment in US MNCs is actually located within the USA itself. An even greater proportion (80%) of overseas employment in US MNCs in located in other developed countries. This is reflected in the fact that (according to UNCTAD data) the average overseas employee of a US MNC earned almost $38,000 in wages/salaries in 2005 i.e. 86% of the average salary of all US employees in that year. These are crude averages, but the orders of magnitude are nonetheless indicative. When one allows for overseas investments by US MNCs which are primarily designed to serve local markets, it is likely that the search for cheap labour accounts for less than ten per cent of all overseas employment in US MNCs.
In 2005, overseas employment in US MNCs was the equivalent of 8 per cent of total employment within the USA itself. This suggests that, if all jobs relocated overseas to access cheap labour were to be repatriated, it would increase employment in the USA by less than one per cent. Clearly, such relocations have had, at best, a marginal impact on US wage levels. If Michael Casey is looking for causes for the compression of US wage rates (which are lower now in real terms than they were forty years ago), he might do better to look at other factors such as large-scale immigration of unskilled workers from abroad, low education and skill levels among large swathes of the indigenous population, anti-trade union legislation and the absence of the social protections for marginal groups which are found in more civilised societies elsewhere.
Thursday, 21 January 2010
Blog on fiscal situation in Greece
Slí Eile: Read the discussion on today's Irish economy on Greek fiscal situation following blog, there, by Michael Burke.
Who really took the hit in Budget 2010?
Slí Eile: Once upon a time there was a thing called ‘poverty proofing’. And there used to be Agencies (State ones) that specialised in looking at ‘poverty’ (and not just inclusion or equality or human rights although some of these things are not quite a la mode anymore). We have not heard a lot about poverty or poverty-proofing in recent times. If anyone has seen or heard about ‘poverty’ in the recent deluge of official reports and 2010 Budget official documentation they might post a link and reference.
However, the poor know all about it and so do the many organisations working to deal directly with people who are poor either by way of direction financial and human help See www.svp.ie or by way of advocacy and policy research (SVP, The Poor Can’t Pay or Social Justice Ireland and others)
One way to examine poverty is to assemble some statistics about it. There are, now, more official indicators and statistics than ever about poverty – relative, absolute, consistent etc and the information is available internationally from agencies like Eurostat, OECD, UNDP etc. One of the difficulties with statistics is that that’s all they are – things that stand. Or is that so? The Etymology is interesting. The German term is Statistik given as ‘study of political facts and figures’, or the New Latin term is statisticus which is derived from Latin status state
Now if statistics is the ‘study of political facts and figures’ there are three types of ‘facts and statistics’
* Awkward known facts and statistics (from the point of view whichever values-based or ideology-based argument one is trying to advance)
* Convenient facts and statistics (from the point of view…ditto)
* Unknown facts and statistics (which one would love to know but which by definition are unknowable either temporarily or permanently and which could be awkward or convenient depending on their place a larger narrative)
Government spin aided by some researchers who should know better is simply that:
A Prices are falling so people are no worse off in real terms; and
B Irish social welfare rates are high by comparison with other countries
C In light of A and B above, any cuts are not going to entail that much hardship.
A is misleading because, for the basket of goods bought by poorer households, prices are dropping less than for all consumer prices taken together including mortgages. B is simply not true. Take out the UK and we are average to below average among the EU15. Previous posts on this website have explored the international comparative data. See here for example.
To wrap up the spin, some are lumping together two Budgets in succession to discover that Budgets 2009 and 2010 together were in some way ‘progressive’ (Budget 2010 took back some windfall gains for SW recipients in Budget 2009 due to unanticipated price deflation).
And now I am going to explore some issues by reference to the following media headline on page 1 of the Irish Times in December:
“Higher earners hit hardest by recent budgets, claims ESRI” was the headline on 23 December. Really? It depends on the data and it depends on which rung of the ladder you are standing on as you peer downwards into the choppy waters. That ‘we should all tighten our belts’ has dramatically different implications for someone who takes a hit of X amount equal to Y percent while standing on an income of Z. That equal removal of children’s allowance for over 16s for the coming summer months can make a mighty difference to someone on half the industrial wage and someone on 5 times the average industrial wage.
The claim was put forward by the ESRI in their Winter 2009 Quarterly Economic Commentary QEC (for a summary see here). They wrote:
‘while Budget 2010 was clearly regressive, the combination of Budgets 2009 and 2010 placed most of the burden of fiscal adjustment on higher earners’
In a very short piece by Callan, Kean and Walsh (‘Distributional Impact of Tax and Welfare Policy Changes’) which is in the full QEC and is not available to non-subscribers the researchers asses the impact of Budgets 2009 and 2010 against ‘a neutral benchmark’ What is this neutral benchmark? It is crude, to say the least. The ESRI have assumed a fall of 2.5% in nominal wages in 2010 (see first summary table in Overview) and compare changes in income for different households divided into five income groups from lowest to highest. Figure A in Box 2 (Page 24) shows a fall of 4% in income for the lowest income group compared to an increase of roughly 1% for each of the other 4 groups. These estimates refer to income units in terms of family units. In other words, income is equivalised in the following way (‘Income Tax and Welfare Policies: Some current issues'):
Family units are ranked by income, adjusting for differences in family size and composition using a simple equivalence scale: 1 for the first adult in the family, 0.66 for a second adult and 0.33 for children.
As the ESRI authors point out, ‘Much of this effect is driven by the very sharp reductions in Job Seeker’s Allowance for those aged under 25.’ Alternatively, the ESRI present the data according to household units. Here, the comparison by income group shows a much smaller drop for the lowest income group (1.5%) and modest gains for all other groups. In comparing on the basis of a households, a household consisting of one member – say a pensioner is treated the same as a household with 2 adults and 3 children.
The ESRI authors also concede (in a separate place here) that:
It is difficult to assess the scale of impact of Budget 2010 on specific groups since many of the policy changes entail shifts within particular groups. Hence, for example, cuts in job seekers allowances impact more on new applicants and the withdrawal of early childcare supplement for all children under 5 with its replacement by a new scheme for young children in the 3-4 age-group.
No allowance was made for the impact of public sector pay cuts (per QEC document)
This latter point is significant because a low-paid worker in the public sector (yes, they are many) had taken an additional hit over and above the other adjustments used in the ESRI calculations. This effects particular groups of public sector workers more than others and needs to be taken into consideration.
So much for Budget 2010.
The ESRI then show a graph for the impacts of Budget 2009 (Figure B on page 25) benchmarking on a 3.5% fall in nominal wages in 2009. Here the pattern is reversed somewhat compared to Budget 2010 – high income earners take the biggest hit at 6% (reflecting among other things income and levies) while the low income households take a lower reduction (or an increase if household composition is taken into account). The income group second from the bottom see an increase in income against the benchmark. Recall that most basic social welfare rates were increased by 3% in Budget 2009 (although other payments were reduced including the Christmas bonus and various discretionary payments and allowances were curtailed in the 2009 Budget).
Having found –according to these estimates and this modelling – that Budget 2010 was ‘regressive’ and Budget 2009 was ‘progressive’ what did the ESRI do? You have guessed. They lumped the impacts together to estimate a ‘Combined Distributional Impact of Budgets 2009 and Budget 2010 versus Wage Indexation (-3.5%)’ and hey presto: the rich were soaked and the poor were less soaked when both budgets are brought into play. Alas, I am a dreadful sceptic refusing to believe the ‘facts’ and sniffing spin somewhere. What about the following:
Supposing the rich took a 10% cut – on average – in 2009 (quite possibly as various types of incomes on assets and employment took a dramatic hammering in the downturn) and the poor took a 5% cut – are we comparing like with like in terms of hardship, health and psychological trauma? Is the tipping point different for someone who is already insecure, anxious and worried that a breakdown in some appliance simply cannot lead to replacement anymore?
Exactly which types of income are taken into account in this model? Do we know anything about those parts of income that are completely or partially outside the tax net? (undeclared income, tax-free income, profits accruing to those companies least hit by the recession?
As the old saying goes
‘First get your facts, then you can distort them at your leisure’! I am not suggesting that the ESRI or other economic commentators have been doing this. However, some folks in the media and the political world are – for their own purposes and researchers and other independent commentators should be careful about how their findings and facts are picked up somewhere else
The Poor Can’t Pay document states:
Government said it had to make difficult decisions. But the decisions now facing many of Ireland’s poorest households will be much more difficult. How can I feed my family tonight? Can we afford to heat the house? Which bill can I pay this week, and which must I hope can be postponed? How will we manage when the bills cannot be postponed any longer?
Based on CSO EU SILC data, the three groups in relative poverty are, in descending order:
Lone parents (36%)
Couples with 3 children (25%)
Others with children (16%)
In other words, working age households with children. These are the groups most heavily targetted in Budget 2010. This is also confirmed in the early post-budget analysis by Social Justice Ireland (refer to Chart 6.1 in the analysis here).
Following an examinations of the Budget 2010, the ‘Poor can’t pay’ research document gives details of how various individuals and family types are affected with reference to concrete examples:
Case Study 1: Unemployed lone parent
Case Study 2: Student about to graduate
Case Study 3: A person claiming the Blind Pension
Case Study 4: A carer for a person with a disability, with an unemployed son
Case Study 5: An unemployed couple with children
Case Study 6: A working lone parent
Case Study 7: A family managing on unemployment and part-time work
How many bankers, senior civil servants, academic and stockbroker economists have a clue what it is really like to live in any of the above real situations? Lets get real.
However, the poor know all about it and so do the many organisations working to deal directly with people who are poor either by way of direction financial and human help See www.svp.ie or by way of advocacy and policy research (SVP, The Poor Can’t Pay or Social Justice Ireland and others)
One way to examine poverty is to assemble some statistics about it. There are, now, more official indicators and statistics than ever about poverty – relative, absolute, consistent etc and the information is available internationally from agencies like Eurostat, OECD, UNDP etc. One of the difficulties with statistics is that that’s all they are – things that stand. Or is that so? The Etymology is interesting. The German term is Statistik given as ‘study of political facts and figures’, or the New Latin term is statisticus which is derived from Latin status state
Now if statistics is the ‘study of political facts and figures’ there are three types of ‘facts and statistics’
* Awkward known facts and statistics (from the point of view whichever values-based or ideology-based argument one is trying to advance)
* Convenient facts and statistics (from the point of view…ditto)
* Unknown facts and statistics (which one would love to know but which by definition are unknowable either temporarily or permanently and which could be awkward or convenient depending on their place a larger narrative)
Government spin aided by some researchers who should know better is simply that:
A Prices are falling so people are no worse off in real terms; and
B Irish social welfare rates are high by comparison with other countries
C In light of A and B above, any cuts are not going to entail that much hardship.
A is misleading because, for the basket of goods bought by poorer households, prices are dropping less than for all consumer prices taken together including mortgages. B is simply not true. Take out the UK and we are average to below average among the EU15. Previous posts on this website have explored the international comparative data. See here for example.
To wrap up the spin, some are lumping together two Budgets in succession to discover that Budgets 2009 and 2010 together were in some way ‘progressive’ (Budget 2010 took back some windfall gains for SW recipients in Budget 2009 due to unanticipated price deflation).
And now I am going to explore some issues by reference to the following media headline on page 1 of the Irish Times in December:
“Higher earners hit hardest by recent budgets, claims ESRI” was the headline on 23 December. Really? It depends on the data and it depends on which rung of the ladder you are standing on as you peer downwards into the choppy waters. That ‘we should all tighten our belts’ has dramatically different implications for someone who takes a hit of X amount equal to Y percent while standing on an income of Z. That equal removal of children’s allowance for over 16s for the coming summer months can make a mighty difference to someone on half the industrial wage and someone on 5 times the average industrial wage.
The claim was put forward by the ESRI in their Winter 2009 Quarterly Economic Commentary QEC (for a summary see here). They wrote:
‘while Budget 2010 was clearly regressive, the combination of Budgets 2009 and 2010 placed most of the burden of fiscal adjustment on higher earners’
In a very short piece by Callan, Kean and Walsh (‘Distributional Impact of Tax and Welfare Policy Changes’) which is in the full QEC and is not available to non-subscribers the researchers asses the impact of Budgets 2009 and 2010 against ‘a neutral benchmark’ What is this neutral benchmark? It is crude, to say the least. The ESRI have assumed a fall of 2.5% in nominal wages in 2010 (see first summary table in Overview) and compare changes in income for different households divided into five income groups from lowest to highest. Figure A in Box 2 (Page 24) shows a fall of 4% in income for the lowest income group compared to an increase of roughly 1% for each of the other 4 groups. These estimates refer to income units in terms of family units. In other words, income is equivalised in the following way (‘Income Tax and Welfare Policies: Some current issues'):
Family units are ranked by income, adjusting for differences in family size and composition using a simple equivalence scale: 1 for the first adult in the family, 0.66 for a second adult and 0.33 for children.
As the ESRI authors point out, ‘Much of this effect is driven by the very sharp reductions in Job Seeker’s Allowance for those aged under 25.’ Alternatively, the ESRI present the data according to household units. Here, the comparison by income group shows a much smaller drop for the lowest income group (1.5%) and modest gains for all other groups. In comparing on the basis of a households, a household consisting of one member – say a pensioner is treated the same as a household with 2 adults and 3 children.
The ESRI authors also concede (in a separate place here) that:
It is difficult to assess the scale of impact of Budget 2010 on specific groups since many of the policy changes entail shifts within particular groups. Hence, for example, cuts in job seekers allowances impact more on new applicants and the withdrawal of early childcare supplement for all children under 5 with its replacement by a new scheme for young children in the 3-4 age-group.
No allowance was made for the impact of public sector pay cuts (per QEC document)
This latter point is significant because a low-paid worker in the public sector (yes, they are many) had taken an additional hit over and above the other adjustments used in the ESRI calculations. This effects particular groups of public sector workers more than others and needs to be taken into consideration.
So much for Budget 2010.
The ESRI then show a graph for the impacts of Budget 2009 (Figure B on page 25) benchmarking on a 3.5% fall in nominal wages in 2009. Here the pattern is reversed somewhat compared to Budget 2010 – high income earners take the biggest hit at 6% (reflecting among other things income and levies) while the low income households take a lower reduction (or an increase if household composition is taken into account). The income group second from the bottom see an increase in income against the benchmark. Recall that most basic social welfare rates were increased by 3% in Budget 2009 (although other payments were reduced including the Christmas bonus and various discretionary payments and allowances were curtailed in the 2009 Budget).
Having found –according to these estimates and this modelling – that Budget 2010 was ‘regressive’ and Budget 2009 was ‘progressive’ what did the ESRI do? You have guessed. They lumped the impacts together to estimate a ‘Combined Distributional Impact of Budgets 2009 and Budget 2010 versus Wage Indexation (-3.5%)’ and hey presto: the rich were soaked and the poor were less soaked when both budgets are brought into play. Alas, I am a dreadful sceptic refusing to believe the ‘facts’ and sniffing spin somewhere. What about the following:
Supposing the rich took a 10% cut – on average – in 2009 (quite possibly as various types of incomes on assets and employment took a dramatic hammering in the downturn) and the poor took a 5% cut – are we comparing like with like in terms of hardship, health and psychological trauma? Is the tipping point different for someone who is already insecure, anxious and worried that a breakdown in some appliance simply cannot lead to replacement anymore?
Exactly which types of income are taken into account in this model? Do we know anything about those parts of income that are completely or partially outside the tax net? (undeclared income, tax-free income, profits accruing to those companies least hit by the recession?
As the old saying goes
‘First get your facts, then you can distort them at your leisure’! I am not suggesting that the ESRI or other economic commentators have been doing this. However, some folks in the media and the political world are – for their own purposes and researchers and other independent commentators should be careful about how their findings and facts are picked up somewhere else
The Poor Can’t Pay document states:
Government said it had to make difficult decisions. But the decisions now facing many of Ireland’s poorest households will be much more difficult. How can I feed my family tonight? Can we afford to heat the house? Which bill can I pay this week, and which must I hope can be postponed? How will we manage when the bills cannot be postponed any longer?
Based on CSO EU SILC data, the three groups in relative poverty are, in descending order:
Lone parents (36%)
Couples with 3 children (25%)
Others with children (16%)
In other words, working age households with children. These are the groups most heavily targetted in Budget 2010. This is also confirmed in the early post-budget analysis by Social Justice Ireland (refer to Chart 6.1 in the analysis here).
Following an examinations of the Budget 2010, the ‘Poor can’t pay’ research document gives details of how various individuals and family types are affected with reference to concrete examples:
Case Study 1: Unemployed lone parent
Case Study 2: Student about to graduate
Case Study 3: A person claiming the Blind Pension
Case Study 4: A carer for a person with a disability, with an unemployed son
Case Study 5: An unemployed couple with children
Case Study 6: A working lone parent
Case Study 7: A family managing on unemployment and part-time work
How many bankers, senior civil servants, academic and stockbroker economists have a clue what it is really like to live in any of the above real situations? Lets get real.
Wednesday, 20 January 2010
Greek Tragedy
Michael Burke: Today's Financial Times carries an interesting piece from Martin Wolf on the severe difficulties being faced by Greece as it attempts to come to terms with its current econmic crisis.
The FT's veteran commentator places Greece's plight in the overall context of developments within the EU, and so has something to say about Ireland. Without minimising the problems of any country, he clearly shows that it is Greece which is an extreme case, not - as is often claimed here - Ireland.
"The problems of Greece are extreme, because it alone of the vulnerable eurozone member countries has both high fiscal deficits and high debt. Other countries with large fiscal deficits are Ireland (12.2 per cent of GDP in 2009) and Spain (9.6 per cent). But, while net public borrowing was 86 per cent of GDP at the end of 2009 in Greece, according to the OECD, in Ireland and Spain it was only 25 and 33 per cent, respectively. Meanwhile, Italy, with a net debt ratio of 97 per cent, had a deficit of “only” 5.5 per cent. Portugal is in the middle, with net debt of 56 per cent of GDP and a deficit of 6.7 per cent of GDP. Thus, the challenge for Greece is larger and more urgent than for the others."
He also warns that those pinning their hopes on export-led growth are in perliously crowded boat in choppy waters, as they now comprise (at least) 70% of the world's economy.
Finally, he has a very illuminating chart of unitl labour costs based on OECD data. Although the chart is small, the trend for Ireland is clear and unmistakeable. Ireland has already experienced a sharp reduction in unit labour costs relative to Greece, Italy and Spain. Of course, Germany is an outlier, with unit labour costs way below that group. But, although it isn't stated by Martin Wolf, that's based on the much stronger growth of German investment.
The FT's veteran commentator places Greece's plight in the overall context of developments within the EU, and so has something to say about Ireland. Without minimising the problems of any country, he clearly shows that it is Greece which is an extreme case, not - as is often claimed here - Ireland.
"The problems of Greece are extreme, because it alone of the vulnerable eurozone member countries has both high fiscal deficits and high debt. Other countries with large fiscal deficits are Ireland (12.2 per cent of GDP in 2009) and Spain (9.6 per cent). But, while net public borrowing was 86 per cent of GDP at the end of 2009 in Greece, according to the OECD, in Ireland and Spain it was only 25 and 33 per cent, respectively. Meanwhile, Italy, with a net debt ratio of 97 per cent, had a deficit of “only” 5.5 per cent. Portugal is in the middle, with net debt of 56 per cent of GDP and a deficit of 6.7 per cent of GDP. Thus, the challenge for Greece is larger and more urgent than for the others."
He also warns that those pinning their hopes on export-led growth are in perliously crowded boat in choppy waters, as they now comprise (at least) 70% of the world's economy.
Finally, he has a very illuminating chart of unitl labour costs based on OECD data. Although the chart is small, the trend for Ireland is clear and unmistakeable. Ireland has already experienced a sharp reduction in unit labour costs relative to Greece, Italy and Spain. Of course, Germany is an outlier, with unit labour costs way below that group. But, although it isn't stated by Martin Wolf, that's based on the much stronger growth of German investment.
The Division of Power Requires Stronger Accountability Institutions
Nat O'Connor: Many current news stories are about accountability, either seeking it or the lack of it. In some cases, there is a clear public understanding of the process we use for seeking accountability. But when it comes to the causes of the banking crisis, there isn't.
Ireland has a number of what you might call 'accountability institutions'. The reports of Eamonn Lillis's trial for murder are familiar territory for most of us. We know about the role of the judge and jury, the prosecution and the defence. We know that Lillis is innocent until proven guilty and that the prosecution are looking for evidence that indicates Lillis's guilt 'beyond all reasonable doubt'. If it were a civil proceeding, only the lower threshold of 'the balance of probability' would have to be met. And in either case, the trial is held in public and reported daily. Most importantly, the proceeding guarantees some kind of result. Either he's innocent or guilty; and if guilty, the judge will impose some kind of sentence.
However, when it comes to the banking inquiry, we seem to lack a sense of how we get accountability. What is the correct place for the inquiry to occur? Who should be involved? What is the correct threshold for evidence? And what guarantee do we have about the outcome?
Maybe the most pressing question is why is this a choice for the Government? Whatever happened to the idea of the division of powers? In parliamentary democracies, one role of the legislative is to hold the executive to account. In the case of our parliament, we were reminded that Oireachtas committees do not have the right to make judgements about disputed claims of fact. This would appear to be a real weakness.
Why don't we have accountability institutions that get automatically activated for public interest inquiries, in the same way that the courts are activated when the DPP decides to prosecute. It is not unreasonable to suppose that a strong, independent inquiry might uncover some embarrassing findings for the Government. All the most reason why governments should not have the power (and temptation) to set up weak or slow inquiries.
What we have had, over the last couple of decades, are a series of ad hoc decisions by successive governments to use different institutions at different times, including tribunals, Oireachtas inquiries (e.g. DIRT) and various commissions of inquiry, such as the Government is proposing in relation to the causes of the banking crisis. Even institutions of the same type work differently in the detail. For example, bizarrely, the Moriarty Tribunal transcripts are copyrighted to a private company, unlike the other Tribunals, which publish their transcripts online.
The Tribunals have been a hugely costly way of patching the gaps in our system of accountability institutions. Setting up some sort of permanent mechanism that can be activated to deal with public interest inquiries would seem to be a priority, whether it is through giving Oireachtas committees more powers or through some other body.
In relation to the Government's proposed commission, according to the Irish Times, the Minister for Finance has said that "an Oireachtas committee would then have an opportunity to examine the report and call witnesses if it wished". But this exposes another weakness in the balance of power. Except for the Public Accounts Committee, Oireachtas committees are chaired by a Government appointee and they all have a pro-Government majority. Hence, their ability to provide independent and robust analysis is limited, especially if there is anything embarrassing to the Government.
The lack of consistency and potential weakness of public interest inquiries is not the only gap in the system. Yesterday, Transparency Ireland launched a report into the weak whistleblower protection in Ireland. Transparency Ireland argue that: “We know what we know about corruption in our banking system and regulatory failure because of whistleblowers. Yet those who would report wrongdoing in our banks and public service still have little or no legal protection or guidance. The situation doesn’t just leave thousands of people exposed to disciplinary or legal action - it leaves the country exposed to another financial crisis”. They are calling for a universal system, like the one that works well in the UK, which will protect whistleblowers everywhere in the State equally. The full report (PDF) can be read here.
Various whistleblowers spoke at Transparency Ireland's launch yesterday, including Eugene McErlene, who was the internal auditor who exposed overcharging in AIB in 2000/2001. McErlene spoke of the very difficult experience of being "isolated" when he spoke out about the wrong-doing that he uncovered. There simply were no adequate accountability institutions in place to which he could turn to. It was very revealing to read an article from last year in the Irish Independent reporting that McErlene does not hold a grudge against AIB. Instead, his frustration was directed at the Financial Regulator.
The issue of how best to find out the root causes of the banking crisis is not just about the detail of the proposed commission such as who's on it, or how many sittings will be private or public (although these are important details). We need to take a long, hard look at our whole system of accountability institutions, from the Oireachtas to the regulators, which are meant to investigate errors and wrong-doing. And the division of powers in a democratic state requires that strong independent accountability institutions will be activated when the public interest requires them, even if their findings may be embarrassing to the executive of the day.
Ireland has a number of what you might call 'accountability institutions'. The reports of Eamonn Lillis's trial for murder are familiar territory for most of us. We know about the role of the judge and jury, the prosecution and the defence. We know that Lillis is innocent until proven guilty and that the prosecution are looking for evidence that indicates Lillis's guilt 'beyond all reasonable doubt'. If it were a civil proceeding, only the lower threshold of 'the balance of probability' would have to be met. And in either case, the trial is held in public and reported daily. Most importantly, the proceeding guarantees some kind of result. Either he's innocent or guilty; and if guilty, the judge will impose some kind of sentence.
However, when it comes to the banking inquiry, we seem to lack a sense of how we get accountability. What is the correct place for the inquiry to occur? Who should be involved? What is the correct threshold for evidence? And what guarantee do we have about the outcome?
Maybe the most pressing question is why is this a choice for the Government? Whatever happened to the idea of the division of powers? In parliamentary democracies, one role of the legislative is to hold the executive to account. In the case of our parliament, we were reminded that Oireachtas committees do not have the right to make judgements about disputed claims of fact. This would appear to be a real weakness.
Why don't we have accountability institutions that get automatically activated for public interest inquiries, in the same way that the courts are activated when the DPP decides to prosecute. It is not unreasonable to suppose that a strong, independent inquiry might uncover some embarrassing findings for the Government. All the most reason why governments should not have the power (and temptation) to set up weak or slow inquiries.
What we have had, over the last couple of decades, are a series of ad hoc decisions by successive governments to use different institutions at different times, including tribunals, Oireachtas inquiries (e.g. DIRT) and various commissions of inquiry, such as the Government is proposing in relation to the causes of the banking crisis. Even institutions of the same type work differently in the detail. For example, bizarrely, the Moriarty Tribunal transcripts are copyrighted to a private company, unlike the other Tribunals, which publish their transcripts online.
The Tribunals have been a hugely costly way of patching the gaps in our system of accountability institutions. Setting up some sort of permanent mechanism that can be activated to deal with public interest inquiries would seem to be a priority, whether it is through giving Oireachtas committees more powers or through some other body.
In relation to the Government's proposed commission, according to the Irish Times, the Minister for Finance has said that "an Oireachtas committee would then have an opportunity to examine the report and call witnesses if it wished". But this exposes another weakness in the balance of power. Except for the Public Accounts Committee, Oireachtas committees are chaired by a Government appointee and they all have a pro-Government majority. Hence, their ability to provide independent and robust analysis is limited, especially if there is anything embarrassing to the Government.
The lack of consistency and potential weakness of public interest inquiries is not the only gap in the system. Yesterday, Transparency Ireland launched a report into the weak whistleblower protection in Ireland. Transparency Ireland argue that: “We know what we know about corruption in our banking system and regulatory failure because of whistleblowers. Yet those who would report wrongdoing in our banks and public service still have little or no legal protection or guidance. The situation doesn’t just leave thousands of people exposed to disciplinary or legal action - it leaves the country exposed to another financial crisis”. They are calling for a universal system, like the one that works well in the UK, which will protect whistleblowers everywhere in the State equally. The full report (PDF) can be read here.
Various whistleblowers spoke at Transparency Ireland's launch yesterday, including Eugene McErlene, who was the internal auditor who exposed overcharging in AIB in 2000/2001. McErlene spoke of the very difficult experience of being "isolated" when he spoke out about the wrong-doing that he uncovered. There simply were no adequate accountability institutions in place to which he could turn to. It was very revealing to read an article from last year in the Irish Independent reporting that McErlene does not hold a grudge against AIB. Instead, his frustration was directed at the Financial Regulator.
The issue of how best to find out the root causes of the banking crisis is not just about the detail of the proposed commission such as who's on it, or how many sittings will be private or public (although these are important details). We need to take a long, hard look at our whole system of accountability institutions, from the Oireachtas to the regulators, which are meant to investigate errors and wrong-doing. And the division of powers in a democratic state requires that strong independent accountability institutions will be activated when the public interest requires them, even if their findings may be embarrassing to the executive of the day.
Tuesday, 19 January 2010
Is recession bad for your health?
Over on Irish Economy, Brendan Walsh links to this report from The Lancet.
Guest post by Rory O'Farrell: Gombeens and Gosplan
Rory O'Farrell: Much as the economy of the Soviet Union was criticized for having a bloated economic planning bureaucracy (Gosplan), the Irish financial sector should be criticized for its bloated size. In 2008 the sector absorbed over 10% of our economy. This is a huge price to pay for the ‘efficient allocation of capital’. On Wednesday, 13th January, the European Trade Union Institute (ETUI) organised a conference 'After the crisis - towards a sustainable growth model'. Though it had a European focus, many of the topics discussed are relevant to Ireland in creating an ‘exit-strategy’ for the financial sector from the recession. While Brian Lenihan has been acting as the financial sector’s fireman there has been a focus on short term (bank guarantee) and medium term measures (NAMA). Concrete long term proposals for changes to regulation have been largely absent from the public debate. What we want from the financial sector should be examined.
At the conference Hélène Schuberth (Austrian National Bank) said what is missing from the European discussion on financial market regulation is the question: what function should the financial system perform? Hélène Schuberth noted that the reform initiative has been minor, and does not emphasize that the financial sector should service the economy. She noted how the financial sector gains rents at the cost of the rest of the economy. While the financial system is supposedly a shock absorber this has been shown not to be true. Sony Kapoor (Re-Define) noted that this is not the first banking crisis. The financial system should be a means to a purpose. He stated that the financial sector is not competitive, and that in the US 30-40% of all corporate profits went to the financial sector, and this is taking rents from the real economy. He asked, if the human resource department of a firm was responsible for consuming 40% of the resources, would this be seen as a well functioning department? Competition within the financial sector is required. However the financial regulators favor large complex banks over smaller simpler banks. Sony Kapoor agreed that the massive state subsidies have contributed to the bloated size of the financial sector
Possible changes to banking regulation included a shift to Asset Based Reserve Requirements, as suggested by Tom Palley. Here, the reserve requirements of banks would be based on the amount of loans they have given rather than the amount of deposits they hold. Yanis Kitromiledes suggested a move back to public service banking or narrow banking. Karel Lanoo (CEPS) stated that so far the debate on a move to narrow banking has been merely academic, and that mutual banking and co-operative banks should be reconsidered. Competition policy should be used so that banks do not become too big to fail, and banking should be viewed as a utility, similar to gas and electricity.
In Ireland the financial sector gains a massive state subsidy in terms of free insurance as Irish banks are too big to fail. This takes the form of deposit guarantees, NAMA, and the implicit free insurance given by the government on banks risky activities. While the economy does benefit from employment in the International Financial Services Centre, these jobs are effectively subsided by the governments of these branches parent firms. Countries like Germany have no interest in subsidising such jobs in Ireland and it is only a matter of time before EU regulations will make such jobs untenable. While subsidies to other sectors such as agriculture have social benefits for rural Ireland, the financial sector subsidy results in large inequalities, and diverts talented workers from careers in areas such as engineering or computer science.
At the moment the Irish government is proposing contradictory policies of ‘stopping reckless lending’ and ‘getting lending going again’. No long-term plan has been put forward for the financial sector. The government should no longer promote the financial sector as an end in itself. In the Irish case it is interesting that there are no moves to increase competition in the financial sector. If anything the number of banks is being reduced. Competition can be increased by promoting mutually owned ‘boring banks’ that have been successful in the past. Also, with the notable exception of Irish Nationwide, the mutual financial sector (namely EBS and the credit unions) have not suffered as much as the rest of the financial sector. The massive state subsidy received by the Irish financial sector could be put to better use in the real, productive, economy. The financial sector should be made to pay its own way.
Luckily our first official language has given us the word gaimbín, meaning monetary interest, from which comes the word gombeen, an apt description for the leadership of the Irish financial sector.
Rory O'Farrell is an economist and researcher at the European Trade Union Institute in Brussels
At the conference Hélène Schuberth (Austrian National Bank) said what is missing from the European discussion on financial market regulation is the question: what function should the financial system perform? Hélène Schuberth noted that the reform initiative has been minor, and does not emphasize that the financial sector should service the economy. She noted how the financial sector gains rents at the cost of the rest of the economy. While the financial system is supposedly a shock absorber this has been shown not to be true. Sony Kapoor (Re-Define) noted that this is not the first banking crisis. The financial system should be a means to a purpose. He stated that the financial sector is not competitive, and that in the US 30-40% of all corporate profits went to the financial sector, and this is taking rents from the real economy. He asked, if the human resource department of a firm was responsible for consuming 40% of the resources, would this be seen as a well functioning department? Competition within the financial sector is required. However the financial regulators favor large complex banks over smaller simpler banks. Sony Kapoor agreed that the massive state subsidies have contributed to the bloated size of the financial sector
Possible changes to banking regulation included a shift to Asset Based Reserve Requirements, as suggested by Tom Palley. Here, the reserve requirements of banks would be based on the amount of loans they have given rather than the amount of deposits they hold. Yanis Kitromiledes suggested a move back to public service banking or narrow banking. Karel Lanoo (CEPS) stated that so far the debate on a move to narrow banking has been merely academic, and that mutual banking and co-operative banks should be reconsidered. Competition policy should be used so that banks do not become too big to fail, and banking should be viewed as a utility, similar to gas and electricity.
In Ireland the financial sector gains a massive state subsidy in terms of free insurance as Irish banks are too big to fail. This takes the form of deposit guarantees, NAMA, and the implicit free insurance given by the government on banks risky activities. While the economy does benefit from employment in the International Financial Services Centre, these jobs are effectively subsided by the governments of these branches parent firms. Countries like Germany have no interest in subsidising such jobs in Ireland and it is only a matter of time before EU regulations will make such jobs untenable. While subsidies to other sectors such as agriculture have social benefits for rural Ireland, the financial sector subsidy results in large inequalities, and diverts talented workers from careers in areas such as engineering or computer science.
At the moment the Irish government is proposing contradictory policies of ‘stopping reckless lending’ and ‘getting lending going again’. No long-term plan has been put forward for the financial sector. The government should no longer promote the financial sector as an end in itself. In the Irish case it is interesting that there are no moves to increase competition in the financial sector. If anything the number of banks is being reduced. Competition can be increased by promoting mutually owned ‘boring banks’ that have been successful in the past. Also, with the notable exception of Irish Nationwide, the mutual financial sector (namely EBS and the credit unions) have not suffered as much as the rest of the financial sector. The massive state subsidy received by the Irish financial sector could be put to better use in the real, productive, economy. The financial sector should be made to pay its own way.
Luckily our first official language has given us the word gaimbín, meaning monetary interest, from which comes the word gombeen, an apt description for the leadership of the Irish financial sector.
Rory O'Farrell is an economist and researcher at the European Trade Union Institute in Brussels
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